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(1) Formation of Genworth and Basis of Presentation
Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.
We have the following operating segments:
• |
U.S. Life Insurance. We offer and manage a variety of insurance and fixed annuity products. Our primary insurance products include life and long-term care insurance. |
• |
International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries. Our lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death. |
• |
Wealth Management. We offer and manage a variety of wealth management services, including investments, advisor support and practice management services. |
• |
International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. |
• |
U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a bulk basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. |
• |
Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and Medicare supplement insurance products. Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business. Effective October 1, 2011, we completed the sale of our Medicare supplement insurance business. |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other non-core businesses that are managed outside of our operating segments.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our Current Report on Form 8-K filed on June 11, 2012 which reflected retrospective changes in accounting for costs associated with acquiring or renewing insurance contracts and changes in the treatment of future policy benefits for level premium term life insurance products. Certain prior year amounts have been reclassified to conform to the current year presentation.
|
(2) Accounting Changes
On January 1, 2012, we adopted new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.
On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.
On January 1, 2012, we adopted new accounting guidance related to repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removed the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria used to determine effective control and was effective for us prospectively for any transactions occurring on or after January 1, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.
On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies and investment contracts, which are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued some support costs, such as underwriting, medical inspection and issuance expenses. Deferred acquisition costs (“DAC”) are subsequently amortized to expense over the lives of the underlying contracts, in relation to the anticipated recognition of premiums or gross profits. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $1.3 billion as of January 1, 2011, and reduced net income (loss) by $63 million, $86 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as marketing and customer solicitation.
Effective January 1, 2012, we changed our treatment of the liability for future policy benefits for our level premium term life insurance products when the liability for a policy falls below zero. Previously, the total liability for future policy benefits included negative reserves calculated at an individual policy level. Through 2010, we issued level premium term life insurance policies whose premiums are contractually determined to be level through a period of time and then increase thereafter. Our previous accounting policy followed the accounting for traditional, long-duration insurance contracts where the reserves are calculated as the present value of expected benefit payments minus the present value of net premiums based on assumptions determined on the policy issuance date including mortality, interest, and lapse rates. This accounting has the effect of causing profits to emerge as a level percentage of premiums, subject to differences in assumed versus actual experience which flow through income as they occur, and for products with an increasing premium stream, such as the level premium term life insurance product, may result in negative reserves for a given policy.
More recent insurance-specific accounting guidance reflects a different accounting philosophy, emphasizing the balance sheet over the income statement, or matching, focus which was the philosophy in place when the traditional, long-duration insurance contract guidance was issued (the accounting model for traditional, long-duration insurance contracts draws upon the principles of matching and conservatism originating in the 1970’s, and does not specifically address negative reserves). More recent accounting models for long-duration contracts specifically prohibit negative reserves, e.g., non-traditional contracts with annuitization benefits and certain participating contracts. These recent accounting models do not impact the reserving for our level premium term life insurance products.
We believe that industry accounting practices for level premium term life insurance product reserving is mixed with some companies “flooring” reserves at zero and others applying our previous accounting policy described above. In 2010, we stopped issuing new level premium term life insurance policies. Thus, as the level premium term policies reach the end of their level premium term periods, the portion of policies with negative reserves in relation to the reserve for all level premium term life insurance products will continue to increase. Our new method of accounting floors the liability for future policy benefits on each level premium term life insurance policy at zero. We believe that flooring reserves at zero is preferable in our circumstances as this alternative accounting policy will not allow negative reserves to accumulate on the balance sheet for this closed block of insurance policies. In implementing this change in accounting, no changes were made to the assumptions that were locked-in at policy inception. We implemented this accounting change retrospectively, which reduced retained earnings and stockholders’ equity by $110 million as of January 1, 2011, and reduced net income (loss) by $10 million, $4 million and $32 million for the years ended December 31, 2011, 2010 and 2009, respectively.
On October 22, 2012, we announced the launch of a new traditional term life insurance product, along with other changes to our life insurance portfolio designed to update and expand our product offerings and further adjust pricing. We will floor the liability for future policy benefits on these level premium term insurance policies at zero, consistent with our accounting for our existing level premium term insurance business.
The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Assets |
||||||||||||||||
Total investments |
$ | 71,904 | $ | — | $ | — | $ | 71,904 | ||||||||
Cash and cash equivalents |
4,488 | — | — | 4,488 | ||||||||||||
Accrued investment income |
691 | — | — | 691 | ||||||||||||
Deferred acquisition costs |
7,327 | (2,134 | ) | — | 5,193 | |||||||||||
Intangible assets |
577 | 3 | — | 580 | ||||||||||||
Goodwill |
1,253 | — | — | 1,253 | ||||||||||||
Reinsurance recoverable |
16,982 | — | 16 | 16,998 | ||||||||||||
Other assets |
958 | — | — | 958 | ||||||||||||
Separate account assets |
10,122 | — | — | 10,122 | ||||||||||||
Total assets |
$ | 114,302 | $ | (2,131 | ) | $ | 16 | $ | 112,187 | |||||||
Liabilities and stockholders’ equity |
||||||||||||||||
Liabilities: |
||||||||||||||||
Future policy benefits |
$ | 31,971 | $ | 3 | $ | 201 | $ | 32,175 | ||||||||
Policyholder account balances |
26,345 | — | — | 26,345 | ||||||||||||
Liability for policy and contract claims |
7,620 | — | — | 7,620 | ||||||||||||
Unearned premiums |
4,257 | (34 | ) | — | 4,223 | |||||||||||
Other liabilities |
6,308 | — | — | 6,308 | ||||||||||||
Borrowings related to securitization entities |
396 | — | — | 396 | ||||||||||||
Non-recourse funding obligations |
3,256 | — | — | 3,256 | ||||||||||||
Long-term borrowings |
4,726 | — | — | 4,726 | ||||||||||||
Deferred tax liability |
1,636 | (733 | ) | (65 | ) | 838 | ||||||||||
Separate account liabilities |
10,122 | — | — | 10,122 | ||||||||||||
Total liabilities |
96,637 | (764 | ) | 136 | 96,009 | |||||||||||
Stockholders’ equity: |
||||||||||||||||
Class A common stock |
1 | — | — | 1 | ||||||||||||
Additional paid-in capital |
12,124 | 12 | — | 12,136 | ||||||||||||
Accumulated other comprehensive income (loss): |
||||||||||||||||
Net unrealized investment gains (losses): |
||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
1,586 | 31 | — | 1,617 | ||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
(132 | ) | — | — | (132 | ) | ||||||||||
Net unrealized investment gains (losses) |
1,454 | 31 | — | 1,485 | ||||||||||||
Derivatives qualifying as hedges |
2,009 | — | — | 2,009 | ||||||||||||
Foreign currency translation and other adjustments |
558 | (5 | ) | — | 553 | |||||||||||
Total accumulated other comprehensive income (loss) |
4,021 | 26 | — | 4,047 | ||||||||||||
Retained earnings |
3,095 | (1,391 | ) | (120 | ) | 1,584 | ||||||||||
Treasury stock, at cost |
(2,700 | ) | — | — | (2,700 | ) | ||||||||||
Total Genworth Financial, Inc.’s stockholders’ equity |
16,541 | (1,353 | ) | (120 | ) | 15,068 | ||||||||||
Noncontrolling interests |
1,124 | (14 | ) | — | 1,110 | |||||||||||
Total stockholders’ equity |
17,665 | (1,367 | ) | (120 | ) | 16,178 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 114,302 | $ | (2,131 | ) | $ | 16 | $ | 112,187 | |||||||
The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 1,461 | $ | — | $ | — | $ | 1,461 | ||||||||
Net investment income |
842 | — | — | 842 | ||||||||||||
Net investment gains (losses) |
(157 | ) | — | — | (157 | ) | ||||||||||
Insurance and investment product fees and other |
375 | — | — | 375 | ||||||||||||
Total revenues |
2,521 | — | — | 2,521 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Benefits and other changes in policy reserves |
1,457 | — | — | 1,457 | ||||||||||||
Interest credited |
194 | — | — | 194 | ||||||||||||
Acquisition and operating expenses, net of deferrals |
510 | 71 | — | 581 | ||||||||||||
Amortization of deferred
acquisition costs and |
190 | (38 | ) | — | 152 | |||||||||||
Interest expense |
124 | — | — | 124 | ||||||||||||
Total benefits and expenses |
2,475 | 33 | — | 2,508 | ||||||||||||
Income before income taxes |
46 | (33 | ) | — | 13 | |||||||||||
Benefit for income taxes |
(19 | ) | 12 | — | (7 | ) | ||||||||||
Net income |
65 | (45 | ) | — | 20 | |||||||||||
Less: net income attributable to noncontrolling interests |
36 | — | — | 36 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders |
$ | 29 | $ | (45 | ) | $ | — | $ | (16 | ) | ||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||||||
Basic (1) |
$ | 0.06 | $ | (0.09 | ) | $ | — | $ | (0.03 | ) | ||||||
Diluted (1) |
$ | 0.06 | $ | (0.09 | ) | $ | — | $ | (0.03 | ) | ||||||
(1) |
May not total due to whole number calculation. |
The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 4,353 | $ | — | $ | — | $ | 4,353 | ||||||||
Net investment income |
2,553 | — | — | 2,553 | ||||||||||||
Net investment gains (losses) |
(225 | ) | — | — | (225 | ) | ||||||||||
Insurance and investment product fees and other |
1,063 | — | — | 1,063 | ||||||||||||
Total revenues |
7,744 | — | — | 7,744 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Benefits and other changes in policy reserves |
4,538 | — | 11 | 4,549 | ||||||||||||
Interest credited |
599 | — | — | 599 | ||||||||||||
Acquisition and operating expenses, net of deferrals |
1,524 | 201 | — | 1,725 | ||||||||||||
Amortization of deferred
acquisition costs and |
572 | (107 | ) | — | 465 | |||||||||||
Interest expense |
385 | — | — | 385 | ||||||||||||
Total benefits and expenses |
7,618 | 94 | 11 | 7,723 | ||||||||||||
Income before income taxes |
126 | (94 | ) | (11 | ) | 21 | ||||||||||
Provision for income taxes |
5 | 7 | (4 | ) | 8 | |||||||||||
Net income |
121 | (101 | ) | (7 | ) | 13 | ||||||||||
Less: net income attributable to noncontrolling interests |
106 | — | — | 106 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders |
$ | 15 | $ | (101 | ) | $ | (7 | ) | $ | (93 | ) | |||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||||||
Basic (1) |
$ | 0.03 | $ | (0.21 | ) | $ | (0.01 | ) | $ | (0.19 | ) | |||||
Diluted (1) |
$ | 0.03 | $ | (0.21 | ) | $ | (0.01 | ) | $ | (0.19 | ) | |||||
(1) |
May not total due to whole number calculation. |
The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income |
$ | 121 | $ | (101 | ) | $ | (7 | ) | $ | 13 | ||||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||||||
Amortization of fixed maturity discounts and premiums and limited partnerships |
(71 | ) | — | — | (71 | ) | ||||||||||
Net investment losses |
225 | — | — | 225 | ||||||||||||
Charges assessed to policyholders |
(507 | ) | — | — | (507 | ) | ||||||||||
Acquisition costs deferred |
(686 | ) | 201 | — | (485 | ) | ||||||||||
Amortization of deferred acquisition costs and intangibles |
572 | (107 | ) | — | 465 | |||||||||||
Deferred income taxes |
(158 | ) | 7 | (4 | ) | (155 | ) | |||||||||
Net increase in trading securities, held-for-sale investments and derivative instruments |
795 | — | — | 795 | ||||||||||||
Stock-based compensation expense |
23 | — | — | 23 | ||||||||||||
Change in certain assets and liabilities: |
||||||||||||||||
Accrued investment income and other assets |
(152 | ) | — | — | (152 | ) | ||||||||||
Insurance reserves |
1,942 | — | 11 | 1,953 | ||||||||||||
Current tax liabilities |
8 | — | — | 8 | ||||||||||||
Other liabilities and policy-related balances |
(80 | ) | — | — | (80 | ) | ||||||||||
Net cash from operating activities |
$ | 2,032 | $ | — | $ | — | $ | 2,032 | ||||||||
The following table presents the balance sheet as of September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Assets |
||||||||||||
Total investments |
$ | 74,893 | $ | 74,893 | $ | — | ||||||
Cash and cash equivalents |
3,741 | 3,741 | — | |||||||||
Accrued investment income |
746 | 746 | — | |||||||||
Deferred acquisition costs |
5,020 | 5,020 | — | |||||||||
Intangible assets |
488 | 488 | — | |||||||||
Goodwill |
1,128 | 1,128 | — | |||||||||
Reinsurance recoverable |
17,195 | 17,172 | 23 | |||||||||
Other assets |
1,010 | 1,010 | — | |||||||||
Separate account assets |
10,166 | 10,166 | — | |||||||||
Total assets |
$ | 114,387 | $ | 114,364 | $ | 23 | ||||||
Liabilities and stockholders’ equity |
||||||||||||
Liabilities: |
||||||||||||
Future policy benefits |
$ | 33,221 | $ | 32,997 | $ | 224 | ||||||
Policyholder account balances |
26,449 | 26,449 | — | |||||||||
Liability for policy and contract claims |
7,545 | 7,545 | — | |||||||||
Unearned premiums |
4,291 | 4,291 | — | |||||||||
Other liabilities |
6,073 | 6,073 | — | |||||||||
Borrowings related to securitization entities |
353 | 353 | — | |||||||||
Non-recourse funding obligations |
2,325 | 2,325 | — | |||||||||
Long-term borrowings |
4,880 | 4,880 | — | |||||||||
Deferred tax liability |
1,437 | 1,508 | (71 | ) | ||||||||
Separate account liabilities |
10,166 | 10,166 | — | |||||||||
Total liabilities |
96,740 | 96,587 | 153 | |||||||||
Stockholders’ equity: |
||||||||||||
Class A common stock |
1 | 1 | — | |||||||||
Additional paid-in capital |
12,162 | 12,162 | — | |||||||||
Accumulated other comprehensive income (loss): |
||||||||||||
Net unrealized investment gains (losses): |
||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
2,641 | 2,641 | — | |||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
(88 | ) | (88 | ) | — | |||||||
Net unrealized investment gains (losses) |
2,553 | 2,553 | — | |||||||||
Derivatives qualifying as hedges |
2,011 | 2,011 | — | |||||||||
Foreign currency translation and other adjustments |
659 | 659 | — | |||||||||
Total accumulated other comprehensive income (loss) |
5,223 | 5,223 | — | |||||||||
Retained earnings |
1,741 | 1,871 | (130 | ) | ||||||||
Treasury stock, at cost |
(2,700 | ) | (2,700 | ) | — | |||||||
Total Genworth Financial, Inc.’s stockholders’ equity |
16,427 | 16,557 | (130 | ) | ||||||||
Noncontrolling interests |
1,220 | 1,220 | — | |||||||||
Total stockholders’ equity |
17,647 | 17,777 | (130 | ) | ||||||||
Total liabilities and stockholders’ equity |
$ | 114,387 | $ | 114,364 | $ | 23 | ||||||
The following table presents the income statement for the three months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Revenues: |
||||||||||||
Premiums |
$ | 1,311 | $ | 1,311 | $ | — | ||||||
Net investment income |
825 | 825 | — | |||||||||
Net investment gains (losses) |
9 | 9 | — | |||||||||
Insurance and investment product fees and other |
391 | 391 | — | |||||||||
Total revenues |
2,536 | 2,536 | — | |||||||||
Benefits and expenses: |
||||||||||||
Benefits and other changes in policy reserves |
1,363 | 1,356 | 7 | |||||||||
Interest credited |
193 | 193 | — | |||||||||
Acquisition and operating expenses, net of deferrals |
504 | 504 | — | |||||||||
Amortization of deferred acquisition costs and intangibles |
162 | 162 | — | |||||||||
Goodwill impairment |
89 | 89 | — | |||||||||
Interest expense |
126 | 126 | — | |||||||||
Total benefits and expenses |
2,437 | 2,430 | 7 | |||||||||
Income before income taxes |
99 | 106 | (7 | ) | ||||||||
Provision for income taxes |
29 | 32 | (3 | ) | ||||||||
Net income |
70 | 74 | (4 | ) | ||||||||
Less: net income attributable to noncontrolling interests |
36 | 36 | — | |||||||||
Net income available to Genworth Financial, Inc.’s common stockholders |
$ | 34 | $ | 38 | $ | (4 | ) | |||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||
Basic |
$ | 0.07 | $ | 0.08 | $ | (0.01 | ) | |||||
Diluted |
$ | 0.07 | $ | 0.08 | $ | (0.01 | ) | |||||
The following table presents the income statement for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Revenues: |
||||||||||||
Premiums |
$ | 3,720 | $ | 3,720 | $ | — | ||||||
Net investment income |
2,503 | 2,503 | — | |||||||||
Net investment gains (losses) |
10 | 10 | — | |||||||||
Insurance and investment product fees and other |
1,252 | 1,252 | — | |||||||||
Total revenues |
7,485 | 7,485 | — | |||||||||
Benefits and expenses: |
||||||||||||
Benefits and other changes in policy reserves |
3,977 | 3,961 | 16 | |||||||||
Interest credited |
582 | 582 | — | |||||||||
Acquisition and operating expenses, net of deferrals |
1,536 | 1,536 | — | |||||||||
Amortization of deferred acquisition costs and intangibles |
582 | 582 | — | |||||||||
Goodwill impairment |
89 | 89 | — | |||||||||
Interest expense |
352 | 352 | — | |||||||||
Total benefits and expenses |
7,118 | 7,102 | 16 | |||||||||
Income before income taxes |
367 | 383 | (16 | ) | ||||||||
Provision for income taxes |
108 | 114 | (6 | ) | ||||||||
Net income |
259 | 269 | (10 | ) | ||||||||
Less: net income attributable to noncontrolling interests |
102 | 102 | — | |||||||||
Net income available to Genworth Financial, Inc.’s common stockholders |
$ | 157 | $ | 167 | $ | (10 | ) | |||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||
Basic |
$ | 0.32 | $ | 0.34 | $ | (0.02 | ) | |||||
Diluted |
$ | 0.32 | $ | 0.34 | $ | (0.02 | ) | |||||
The following table presents the net cash flows from operating activities for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 259 | $ | 269 | $ | (10 | ) | |||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||
Amortization of fixed maturity discounts and premiums and limited partnerships |
(59 | ) | (59 | ) | — | |||||||
Net investment gains |
(10 | ) | (10 | ) | — | |||||||
Charges assessed to policyholders |
(590 | ) | (590 | ) | — | |||||||
Acquisition costs deferred |
(456 | ) | (456 | ) | — | |||||||
Amortization of deferred acquisition costs and intangibles |
582 | 582 | — | |||||||||
Goodwill impairment |
89 | 89 | — | |||||||||
Deferred income taxes |
14 | 20 | (6 | ) | ||||||||
Gain on sale of subsidiary |
(15 | ) | (15 | ) | — | |||||||
Net increase in trading securities, held-for-sale investments and derivative instruments |
66 | 66 | — | |||||||||
Stock-based compensation expense |
20 | 20 | — | |||||||||
Change in certain assets and liabilities: |
||||||||||||
Accrued investment income and other assets |
(160 | ) | (160 | ) | — | |||||||
Insurance reserves |
1,672 | 1,656 | 16 | |||||||||
Current tax liabilities |
(190 | ) | (190 | ) | — | |||||||
Other liabilities and policy-related balances |
(795 | ) | (795 | ) | — | |||||||
Net cash from operating activities |
$ | 427 | $ | 427 | $ | — | ||||||
Accounting Pronouncements Not Yet Adopted
In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. This new accounting guidance has an effective date of January 1, 2013, with early adoption permitted in certain circumstances. We do not expect the adoption of this accounting guidance to have an impact on our consolidated financial statements.
In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have a material impact on our consolidated financial statements.
|
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Fixed maturity securities—taxable |
$ | 659 | $ | 669 | $ | 1,988 | $ | 2,032 | ||||||||
Fixed maturity securities—non-taxable |
2 | 8 | 9 | 29 | ||||||||||||
Commercial mortgage loans |
87 | 89 | 256 | 273 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities |
8 | 11 | 24 | 30 | ||||||||||||
Equity securities |
4 | 3 | 14 | 16 | ||||||||||||
Other invested assets |
48 | 42 | 157 | 131 | ||||||||||||
Policy loans |
31 | 30 | 93 | 89 | ||||||||||||
Cash, cash equivalents and short-term investments |
8 | 12 | 28 | 24 | ||||||||||||
Gross investment income before expenses and fees |
847 | 864 | 2,569 | 2,624 | ||||||||||||
Expenses and fees |
(22 | ) | (22 | ) | (66 | ) | (71 | ) | ||||||||
Net investment income |
$ | 825 | $ | 842 | $ | 2,503 | $ | 2,553 | ||||||||
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Available-for-sale securities: |
||||||||||||||||
Realized gains |
$ | 28 | $ | 59 | $ | 112 | $ | 113 | ||||||||
Realized losses |
(14 | ) | (23 | ) | (79 | ) | (88 | ) | ||||||||
Net realized gains (losses) on available-for-sale securities |
14 | 36 | 33 | 25 | ||||||||||||
Impairments: |
||||||||||||||||
Total other-than-temporary impairments |
(26 | ) | (39 | ) | (84 | ) | (98 | ) | ||||||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) |
(3 | ) | (13 | ) | (1 | ) | (16 | ) | ||||||||
Net other-than-temporary impairments |
(29 | ) | (52 | ) | (85 | ) | (114 | ) | ||||||||
Trading securities |
14 | 11 | 21 | 36 | ||||||||||||
Commercial mortgage loans |
2 | 3 | 7 | 4 | ||||||||||||
Net gains (losses) related to securitization entities |
18 | (57 | ) | 48 | (52 | ) | ||||||||||
Derivative instruments (1) |
(2 | ) | (76 | ) | (4 | ) | (101 | ) | ||||||||
Contingent consideration adjustment |
(8 | ) | (22 | ) | (10 | ) | (23 | ) | ||||||||
Net investment gains (losses) |
$ | 9 | $ | (157 | ) | $ | 10 | $ | (225 | ) | ||||||
(1) |
See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses). |
We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended September 30, 2012 and
2011 was $228 million and $263 million, respectively, which was approximately 96% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2012 and 2011 was $911 million and $954 million, respectively, which was approximately 93% of book value for both periods.
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of and for the periods indicated:
As of or for the three months ended September 30, |
As of or for the nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Beginning balance |
$ | 588 | $ | 726 | $ | 646 | $ | 784 | ||||||||
Additions: |
||||||||||||||||
Other-than-temporary impairments not previously recognized |
5 | 27 | 13 | 31 | ||||||||||||
Increases related to other-than-temporary impairments previously recognized |
10 | 24 | 42 | 72 | ||||||||||||
Reductions: |
||||||||||||||||
Securities sold, paid down or disposed |
(66 | ) | (58 | ) | (164 | ) | (168 | ) | ||||||||
Ending balance |
$ | 537 | $ | 719 | $ | 537 | $ | 719 | ||||||||
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
(Amounts in millions) |
September 30, 2012 | December 31, 2011 | ||||||
Net unrealized gains (losses) on investment securities: |
||||||||
Fixed maturity securities |
$ | 5,925 | $ | 3,742 | ||||
Equity securities |
24 | 5 | ||||||
Other invested assets |
(23 | ) | (30 | ) | ||||
Subtotal |
5,926 | 3,717 | ||||||
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves |
(1,867 | ) | (1,303 | ) | ||||
Income taxes, net |
(1,412 | ) | (840 | ) | ||||
Net unrealized investment gains (losses) |
2,647 | 1,574 | ||||||
Less: net unrealized investment gains (losses) attributable to noncontrolling interests |
94 | 89 | ||||||
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc. |
$ | 2,553 | $ | 1,485 | ||||
The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:
As of or for the three months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Beginning balance |
$ | 2,016 | $ | 264 | ||||
Unrealized gains (losses) arising during the period: |
||||||||
Unrealized gains (losses) on investment securities |
1,040 | 2,365 | ||||||
Adjustment to deferred acquisition costs |
(39 | ) | (41 | ) | ||||
Adjustment to present value of future profits |
11 | (61 | ) | |||||
Adjustment to sales inducements |
(17 | ) | 6 | |||||
Adjustment to benefit reserves |
(171 | ) | (369 | ) | ||||
Provision for income taxes |
(288 | ) | (665 | ) | ||||
Change in unrealized gains (losses) on investment securities |
536 | 1,235 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(6) and $(5) |
9 | 11 | ||||||
Change in net unrealized investment gains (losses) |
545 | 1,246 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
8 | 29 | ||||||
Ending balance |
$ | 2,553 | $ | 1,481 | ||||
As of or for
the nine months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Beginning balance |
$ | 1,485 | $ | (80 | ) | |||
Unrealized gains (losses) arising during the period: |
||||||||
Unrealized gains (losses) on investment securities |
2,157 | 2,932 | ||||||
Adjustment to deferred acquisition costs |
(138 | ) | (89 | ) | ||||
Adjustment to present value of future profits |
(11 | ) | (77 | ) | ||||
Adjustment to sales inducements |
(31 | ) | (1 | ) | ||||
Adjustment to benefit reserves |
(384 | ) | (400 | ) | ||||
Provision for income taxes |
(553 | ) | (828 | ) | ||||
Change in unrealized gains (losses) on investment securities |
1,040 | 1,537 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(19) and $(31) |
33 | 58 | ||||||
Change in net unrealized investment gains (losses) |
1,073 | 1,595 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
5 | 34 | ||||||
Ending balance |
$ | 2,553 | $ | 1,481 | ||||
(d) Fixed Maturity and Equity Securities
As of September 30, 2012, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) |
Amortized cost or cost |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Fair value |
||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 4,448 | $ | 1,060 | $ | — | $ | (5 | ) | $ | — | $ | 5,503 | |||||||||||
Tax-exempt |
328 | 17 | — | (43 | ) | — | 302 | |||||||||||||||||
Government—non-U.S. |
2,315 | 260 | — | (1 | ) | — | 2,574 | |||||||||||||||||
U.S. corporate |
23,062 | 3,368 | 20 | (144 | ) | — | 26,306 | |||||||||||||||||
Corporate—non-U.S. |
14,256 | 1,190 | — | (78 | ) | — | 15,368 | |||||||||||||||||
Residential mortgage-backed |
5,837 | 562 | 12 | (150 | ) | (142 | ) | 6,119 | ||||||||||||||||
Commercial mortgage-backed |
3,240 | 185 | 4 | (112 | ) | (31 | ) | 3,286 | ||||||||||||||||
Other asset-backed |
2,799 | 44 | — | (86 | ) | (1 | ) | 2,756 | ||||||||||||||||
Total fixed maturity securities |
56,285 | 6,686 | 36 | (619 | ) | (174 | ) | 62,214 | ||||||||||||||||
Equity securities |
499 | 32 | — | (7 | ) | — | 524 | |||||||||||||||||
Total available-for-sale securities |
$ | 56,784 | $ | 6,718 | $ | 36 | $ | (626 | ) | $ | (174 | ) | $ | 62,738 | ||||||||||
As of December 31, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) |
Amortized cost or cost |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Fair value |
||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 3,946 | $ | 918 | $ | — | $ | (1 | ) | $ | — | $ | 4,863 | |||||||||||
Tax-exempt |
564 | 15 | — | (76 | ) | — | 503 | |||||||||||||||||
Government—non-U.S. |
2,017 | 196 | — | (2 | ) | — | 2,211 | |||||||||||||||||
U.S. corporate |
23,024 | 2,542 | 18 | (325 | ) | (1 | ) | 25,258 | ||||||||||||||||
Corporate—non-U.S. |
13,156 | 819 | — | (218 | ) | — | 13,757 | |||||||||||||||||
Residential mortgage-backed |
5,695 | 446 | 9 | (252 | ) | (203 | ) | 5,695 | ||||||||||||||||
Commercial mortgage-backed |
3,470 | 157 | 4 | (179 | ) | (52 | ) | 3,400 | ||||||||||||||||
Other asset-backed |
2,686 | 18 | — | (95 | ) | (1 | ) | 2,608 | ||||||||||||||||
Total fixed maturity securities |
54,558 | 5,111 | 31 | (1,148 | ) | (257 | ) | 58,295 | ||||||||||||||||
Equity securities |
356 | 19 | — | (14 | ) | — | 361 | |||||||||||||||||
Total available-for-sale securities |
$ | 54,914 | $ | 5,130 | $ | 31 | $ | (1,162 | ) | $ | (257 | ) | $ | 58,656 | ||||||||||
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2012:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair Value |
Gross unrealized losses (1) |
Number of securities |
Fair value |
Gross unrealized losses (2) |
Number of securities |
|||||||||||||||||||||||||||
Description of Securities |
||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 303 | $ | (5 | ) | 7 | $ | — | $ | — | — | $ | 303 | $ | (5 | ) | 7 | |||||||||||||||||||
Tax-exempt |
— | — | — | 129 | (43 | ) | 15 | 129 | (43 | ) | 15 | |||||||||||||||||||||||||
Government—non-U.S. |
— | — | — | 57 | (1 | ) | 10 | 57 | (1 | ) | 10 | |||||||||||||||||||||||||
U.S. corporate |
382 | (11 | ) | 72 | 938 | (133 | ) | 91 | 1,320 | (144 | ) | 163 | ||||||||||||||||||||||||
Corporate—non-U.S. |
468 | (13 | ) | 90 | 625 | (65 | ) | 61 | 1,093 | (78 | ) | 151 | ||||||||||||||||||||||||
Residential mortgage-backed |
120 | (2 | ) | 22 | 577 | (290 | ) | 304 | 697 | (292 | ) | 326 | ||||||||||||||||||||||||
Commercial mortgage-backed |
— | — | — | 830 | (143 | ) | 150 | 830 | (143 | ) | 150 | |||||||||||||||||||||||||
Other asset-backed |
141 | (1 | ) | 31 | 185 | (86 | ) | 20 | 326 | (87 | ) | 51 | ||||||||||||||||||||||||
Subtotal, fixed maturity securities |
1,414 | (32 | ) | 222 | 3,341 | (761 | ) | 651 | 4,755 | (793 | ) | 873 | ||||||||||||||||||||||||
Equity securities |
91 | (5 | ) | 40 | 31 | (2 | ) | 20 | 122 | (7 | ) | 60 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 1,505 | $ | (37 | ) | 262 | $ | 3,372 | $ | (763 | ) | 671 | $ | 4,877 | $ | (800 | ) | 933 | ||||||||||||||||||
% Below cost—fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
$ | 1,405 | $ | (30 | ) | 216 | $ | 2,434 | $ | (198 | ) | 371 | $ | 3,839 | $ | (228 | ) | 587 | ||||||||||||||||||
20%-50% Below cost |
9 | (2 | ) | 6 | 842 | (385 | ) | 188 | 851 | (387 | ) | 194 | ||||||||||||||||||||||||
>50% Below cost |
— | — | — | 65 | (178 | ) | 92 | 65 | (178 | ) | 92 | |||||||||||||||||||||||||
Total fixed maturity securities |
1,414 | (32 | ) | 222 | 3,341 | (761 | ) | 651 | 4,755 | (793 | ) | 873 | ||||||||||||||||||||||||
% Below cost—equity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
87 | (4 | ) | 39 | 28 | (1 | ) | 19 | 115 | (5 | ) | 58 | ||||||||||||||||||||||||
20%-50% Below cost |
4 | (1 | ) | 1 | 3 | (1 | ) | 1 | 7 | (2 | ) | 2 | ||||||||||||||||||||||||
Total equity securities |
91 | (5 | ) | 40 | 31 | (2 | ) | 20 | 122 | (7 | ) | 60 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 1,505 | $ | (37 | ) | 262 | $ | 3,372 | $ | (763 | ) | 671 | $ | 4,877 | $ | (800 | ) | 933 | ||||||||||||||||||
Investment grade |
$ | 1,283 | $ | (22 | ) | 203 | $ | 2,173 | $ | (293 | ) | 308 | $ | 3,456 | $ | (315 | ) | 511 | ||||||||||||||||||
Below investment grade (3) |
222 | (15 | ) | 59 | 1,199 | (470 | ) | 363 | 1,421 | (485 | ) | 422 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 1,505 | $ | (37 | ) | 262 | $ | 3,372 | $ | (763 | ) | 671 | $ | 4,877 | $ | (800 | ) | 933 | ||||||||||||||||||
(1) |
Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities. |
(2) |
Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities. |
(3) |
Amounts that have been in a continuous loss position for 12 months or more included $171 million of unrealized losses on other-than-temporarily impaired securities. |
As indicated in the table above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to lower credit ratings since acquisition for corporate securities across various industry sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2012.
Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More
Of the $198 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and approximately 62% of the unrealized losses were related to investment grade securities as of September 30, 2012. These unrealized losses were attributable to lower credit ratings for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector as well as mortgage-backed and asset-backed securities. The average fair value percentage below cost for these securities was approximately 7% as of September 30, 2012. See below for additional discussion related to fixed maturity securities that have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.
The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of September 30, 2012:
Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||
Tax-exempt |
$ | 114 | $ | (40 | ) | 5 | % | 10 | $ | — | $ | — | — | % | — | |||||||||||||||||
U.S. corporate |
138 | (44 | ) | 6 | 7 | — | — | — | — | |||||||||||||||||||||||
Corporate—non-U.S. |
29 | (17 | ) | 2 | 8 | 2 | (2 | ) | — | 1 | ||||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||||||
Residential mortgage-backed |
38 | (22 | ) | 3 | 17 | 6 | (12 | ) | 2 | 10 | ||||||||||||||||||||||
Commercial mortgage-backed |
18 | (7 | ) | 1 | 6 | — | (1 | ) | — | 1 | ||||||||||||||||||||||
Other asset-backed |
38 | (26 | ) | 3 | 4 | — | — | — | — | |||||||||||||||||||||||
Total structured securities |
94 | (55 | ) | 7 | 27 | 6 | (13 | ) | 2 | 11 | ||||||||||||||||||||||
Total |
$ | 375 | $ | (156 | ) | 20 | % | 52 | $ | 8 | $ | (15 | ) | 2 | % | 12 | ||||||||||||||||
Below Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||
U.S. corporate |
$ | 80 | $ | (32 | ) | 4 | % | 7 | $ | — | $ | — | — | % | — | |||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||||||
Residential mortgage-backed |
221 | (112 | ) | 14 | 95 | 40 | (124 | ) | 16 | 67 | ||||||||||||||||||||||
Commercial mortgage-backed |
117 | (49 | ) | 6 | 31 | 7 | (23 | ) | 3 | 10 | ||||||||||||||||||||||
Other asset-backed |
49 | (36 | ) | 5 | 3 | 10 | (16 | ) | 2 | 3 | ||||||||||||||||||||||
Total structured securities |
387 | (197 | ) | 25 | 129 | 57 | (163 | ) | 21 | 80 | ||||||||||||||||||||||
Total |
$ | 467 | $ | (229 | ) | 29 | % | 136 | $ | 57 | $ | (163 | ) | 21 | % | 80 | ||||||||||||||||
For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost. See the following for further discussion of gross unrealized losses by asset class.
Tax-Exempt Securities
As indicated in the table above, $40 million of gross unrealized losses were related to tax-exempt securities that have been in a continuous unrealized loss position for more than 12 months and were more than 20% below cost. The unrealized losses for tax-exempt securities represent municipal bonds that were diversified by state as well as municipality or political subdivision within those states. Of these tax-exempt securities, the average unrealized loss was approximately $4 million which represented an average of 26% below cost. The unrealized losses continue to persist due to a combination of below market spreads, very low coupons, along with economic uncertainty related to special revenues supporting these obligations, as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, certain of these securities have been negatively impacted as a result of ratings downgrades of certain bond insurers associated with the security. In our analysis of impairment for these securities, we expect to recover our amortized cost from the cash flows of the underlying securities before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of these securities and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.
Corporate Debt Securities
The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of September 30, 2012:
Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Industry: |
||||||||||||||||||||||||||||||||
Finance and insurance |
$ | 136 | $ | (52 | ) | 7 | % | 14 | $ | 2 | $ | (2 | ) | — | % | 1 | ||||||||||||||||
Consumer-non-cyclical |
31 | (9 | ) | 1 | 1 | — | — | — | — | |||||||||||||||||||||||
Total |
$ | 167 | $ | (61 | ) | 8 | % | 15 | $ | 2 | $ | (2 | ) | — | % | 1 | ||||||||||||||||
Below Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Industry: |
||||||||||||||||||||||||||||||||
Finance and insurance |
$ | 66 | $ | (23 | ) | 3 | % | 4 | $ | — | $ | — | — | % | — | |||||||||||||||||
Consumer-non-cyclical |
11 | (8 | ) | 1 | 2 | — | — | — | — | |||||||||||||||||||||||
Transportation |
3 | (1 | ) | — | 1 | — | — | — | — | |||||||||||||||||||||||
Total |
$ | 80 | $ | (32 | ) | 4 | % | 7 | $ | — | $ | — | — | % | — | |||||||||||||||||
Of the total unrealized losses of $95 million for corporate fixed maturity securities presented in the preceding tables, $77 million, or 81%, of the unrealized losses related to issuers in the finance and insurance sector that were 50% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of September 30, 2012. Of the $77 million of unrealized losses related to the finance and insurance industry, $71 million related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.
We expect that our investments in corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of corporate securities in the future.
Structured Securities
Of the $428 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $148 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. housing market.
While we considered the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: i) the payment history, including failure to make scheduled payments; ii) current payment status; iii) current and historical outstanding balances; iv) current levels of subordination and losses incurred to date; and v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; ii) current payment status; iii) loan to collateral value ratios, as applicable; iv) vintage; and v) other underlying characteristics such as current financial condition.
We used our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.
Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of September 30, 2012.
Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2011:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses (1) |
Number of securities |
Fair value |
Gross unrealized losses (2) |
Number of securities |
|||||||||||||||||||||||||||
Description of Securities |
||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 160 | $ | (1 | ) | 2 | $ | — | $ | — | — | $ | 160 | $ | (1 | ) | 2 | |||||||||||||||||||
Tax-exempt |
— | — | — | 230 | (76 | ) | 72 | 230 | (76 | ) | 72 | |||||||||||||||||||||||||
Government—non-U.S. |
90 | (1 | ) | 25 | 8 | (1 | ) | 8 | 98 | (2 | ) | 33 | ||||||||||||||||||||||||
U.S. corporate |
1,721 | (68 | ) | 175 | 1,416 | (258 | ) | 136 | 3,137 | (326 | ) | 311 | ||||||||||||||||||||||||
Corporate—non-U.S. |
1,475 | (86 | ) | 188 | 705 | (132 | ) | 75 | 2,180 | (218 | ) | 263 | ||||||||||||||||||||||||
Residential mortgage-backed |
276 | (5 | ) | 68 | 727 | (450 | ) | 359 | 1,003 | (455 | ) | 427 | ||||||||||||||||||||||||
Commercial mortgage-backed |
282 | (36 | ) | 49 | 831 | (195 | ) | 159 | 1,113 | (231 | ) | 208 | ||||||||||||||||||||||||
Other asset-backed |
623 | (3 | ) | 83 | 309 | (93 | ) | 35 | 932 | (96 | ) | 118 | ||||||||||||||||||||||||
Subtotal, fixed maturity securites |
4,627 | (200 | ) | 590 | 4,226 | (1,205 | ) | 844 | 8,853 | (1,405 | ) | 1,434 | ||||||||||||||||||||||||
Equity securities |
92 | (11 | ) | 39 | 25 | (3 | ) | 13 | 117 | (14 | ) | 52 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 4,719 | $ | (211 | ) | 629 | $ | 4,251 | $ | (1,208 | ) | 857 | $ | 8,970 | $ | (1,419 | ) | 1,486 | ||||||||||||||||||
% Below cost—fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
$ | 4,545 | $ | (156 | ) | 548 | $ | 2,758 | $ | (252 | ) | 435 | $ | 7,303 | $ | (408 | ) | 983 | ||||||||||||||||||
20%-50% Below cost |
78 | (30 | ) | 27 | 1,335 | (653 | ) | 283 | 1,413 | (683 | ) | 310 | ||||||||||||||||||||||||
>50% Below cost |
4 | (14 | ) | 15 | 133 | (300 | ) | 126 | 137 | (314 | ) | 141 | ||||||||||||||||||||||||
Total fixed maturity securities |
4,627 | (200 | ) | 590 | 4,226 | (1,205 | ) | 844 | 8,853 | (1,405 | ) | 1,434 | ||||||||||||||||||||||||
% Below cost—equity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
80 | (6 | ) | 36 | 21 | (1 | ) | 12 | 101 | (7 | ) | 48 | ||||||||||||||||||||||||
20%-50% Below cost |
12 | (5 | ) | 3 | 4 | (2 | ) | 1 | 16 | (7 | ) | 4 | ||||||||||||||||||||||||
Total equity securities |
92 | (11 | ) | 39 | 25 | (3 | ) | 13 | 117 | (14 | ) | 52 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 4,719 | $ | (211 | ) | 629 | $ | 4,251 | $ | (1,208 | ) | 857 | $ | 8,970 | $ | (1,419 | ) | 1,486 | ||||||||||||||||||
Investment grade |
$ | 4,292 | $ | (165 | ) | 502 | $ | 3,066 | $ | (577 | ) | 479 | $ | 7,358 | $ | (742 | ) | 981 | ||||||||||||||||||
Below investment grade (3) |
427 | (46 | ) | 127 | 1,185 | (631 | ) | 378 | 1,612 | (677 | ) | 505 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 4,719 | $ | (211 | ) | 629 | $ | 4,251 | $ | (1,208 | ) | 857 | $ | 8,970 | $ | (1,419 | ) | 1,486 | ||||||||||||||||||
(1) |
Amounts included $248 million of unrealized losses on other-than-temporarily impaired securities. |
(2) |
Amounts included $257 million of unrealized losses on other-than-temporarily impaired securities. |
(3) |
Amounts that have been in a continuous loss position for 12 months or more included $235 million of unrealized losses on other-than-temporarily impaired securities. |
The scheduled maturity distribution of fixed maturity securities as of September 30, 2012 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
(Amounts in millions) |
Amortized cost or cost |
Fair value |
||||||
Due one year or less |
$ | 3,058 | $ | 3,097 | ||||
Due after one year through five years |
10,639 | 11,162 | ||||||
Due after five years through ten years |
10,916 | 12,009 | ||||||
Due after ten years |
19,796 | 23,785 | ||||||
Subtotal |
44,409 | 50,053 | ||||||
Residential mortgage-backed |
5,837 | 6,119 | ||||||
Commercial mortgage-backed |
3,240 | 3,286 | ||||||
Other asset-backed |
2,799 | 2,756 | ||||||
Total |
$ | 56,285 | $ | 62,214 | ||||
As of September 30, 2012, $4,782 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of September 30, 2012, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 23%, 20% and 12% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.
As of September 30, 2012, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of prepayments, amortization and allowance for loan losses.
We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Property type: |
||||||||||||||||
Retail |
$ | 1,882 | 32 | % | $ | 1,898 | 31 | % | ||||||||
Industrial |
1,633 | 27 | 1,707 | 28 | ||||||||||||
Office |
1,533 | 26 | 1,590 | 26 | ||||||||||||
Apartments |
578 | 10 | 641 | 10 | ||||||||||||
Mixed use/other |
277 | 5 | 304 | 5 | ||||||||||||
Subtotal |
5,903 | 100 | % | 6,140 | 100 | % | ||||||||||
Unamortized balance of loan origination fees and costs |
2 | 3 | ||||||||||||||
Allowance for losses |
(44 | ) | (51 | ) | ||||||||||||
Total |
$ | 5,861 | $ | 6,092 | ||||||||||||
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Geographic region: |
||||||||||||||||
South Atlantic |
$ | 1,619 | 27 | % | $ | 1,631 | 27 | % | ||||||||
Pacific |
1,526 | 26 | 1,539 | 25 | ||||||||||||
Middle Atlantic |
710 | 12 | 734 | 12 | ||||||||||||
East North Central |
513 | 9 | 557 | 9 | ||||||||||||
Mountain |
442 | 7 | 497 | 8 | ||||||||||||
New England |
342 | 6 | 388 | 6 | ||||||||||||
West North Central |
339 | 6 | 337 | 5 | ||||||||||||
West South Central |
260 | 4 | 298 | 5 | ||||||||||||
East South Central |
152 | 3 | 159 | 3 | ||||||||||||
Subtotal |
5,903 | 100 | % | 6,140 | 100 | % | ||||||||||
Unamortized balance of loan origination fees and costs |
2 | 3 | ||||||||||||||
Allowance for losses |
(44 | ) | (51 | ) | ||||||||||||
Total |
$ | 5,861 | $ | 6,092 | ||||||||||||
The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
31 - 60 days past due |
61 - 90 days past due |
Greater than 90 days past due |
Total past due |
Current | Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 7 | $ | 3 | $ | 3 | $ | 13 | $ | 1,869 | $ | 1,882 | ||||||||||||
Industrial |
— | — | — | — | 1,633 | 1,633 | ||||||||||||||||||
Office |
— | — | 4 | 4 | 1,529 | 1,533 | ||||||||||||||||||
Apartments |
— | — | 2 | 2 | 576 | 578 | ||||||||||||||||||
Mixed use/other |
67 | — | — | 67 | 210 | 277 | ||||||||||||||||||
Total recorded investment |
$ | 74 | $ | 3 | $ | 9 | $ | 86 | $ | 5,817 | $ | 5,903 | ||||||||||||
% of total commercial mortgage loans |
1 | % | — | % | — | % | 1 | % | 99 | % | 100 | % | ||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
31 - 60 days past due |
61 - 90 days past due |
Greater than 90 days past due |
Total past due |
Current | Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 107 | $ | — | $ | — | $ | 107 | $ | 1,791 | $ | 1,898 | ||||||||||||
Industrial |
3 | — | — | 3 | 1,704 | 1,707 | ||||||||||||||||||
Office |
4 | 3 | 15 | 22 | 1,568 | 1,590 | ||||||||||||||||||
Apartments |
— | — | — | — | 641 | 641 | ||||||||||||||||||
Mixed use/other |
1 | — | — | 1 | 303 | 304 | ||||||||||||||||||
Total recorded investment |
$ | 115 | $ | 3 | $ | 15 | $ | 133 | $ | 6,007 | $ | 6,140 | ||||||||||||
% of total commercial mortgage loans |
2 | % | — | % | — | % | 2 | % | 98 | % | 100 | % | ||||||||||||
As of September 30, 2012 and December 31, 2011, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on nonaccrual status as of September 30, 2012 and December 31, 2011.
As of and for the nine months ended September 30, 2012 and the year ended December 31, 2011, we modified or extended 30 and 39 commercial mortgage loans, respectively, with a total carrying value of $197 million and $252 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings. As of and for the year ended December 31, 2011, we modified or extended one commercial mortgage loan with a total carrying value of $3 million that was considered a troubled debt restructuring. As part of this troubled debt restructuring, we forgave default penalties and fees. This troubled debt restructuring did not result in any forgiveness in the outstanding principal amount owed by the borrower or a change to the original contractual interest rate.
The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Allowance for credit losses: |
||||||||||||||||
Beginning balance |
$ | 46 | $ | 57 | $ | 51 | $ | 59 | ||||||||
Charge-offs |
(3 | ) | — | (4 | ) | (5 | ) | |||||||||
Recoveries |
— | — | — | — | ||||||||||||
Provision |
1 | (3 | ) | (3 | ) | — | ||||||||||
Ending balance |
$ | 44 | $ | 54 | $ | 44 | $ | 54 | ||||||||
Ending allowance for individually impaired loans |
$ | — | $ | — | $ | — | $ | — | ||||||||
Ending allowance for loans not individually impaired that were evaluated collectively for impairment |
$ | 44 | $ | 54 | $ | 44 | $ | 54 | ||||||||
Recorded investment: |
||||||||||||||||
Ending balance |
$ | 5,903 | $ | 6,321 | $ | 5,903 | $ | 6,321 | ||||||||
Ending balance of individually impaired loans |
$ | 8 | $ | 13 | $ | 8 | $ | 13 | ||||||||
Ending balance of loans not individually impaired that were evaluated collectively for impairment |
$ | 5,895 | $ | 6,308 | $ | 5,895 | $ | 6,308 | ||||||||
As of September 30, 2012, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $8 million, an unpaid principal balance of $11 million, charge-offs of $3 million and an average recorded investment of $4 million. As of December 31, 2011, we had individually impaired commercial mortgage loans included within the office property type with a recorded investment of $10 million, an unpaid principal balance of $13 million, charge-offs of $3 million and an average recorded investment of $10 million.
In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.
The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 560 | $ | 298 | $ | 809 | $ | 177 | $ | 38 | $ | 1,882 | ||||||||||||
Industrial |
528 | 244 | 600 | 220 | 41 | 1,633 | ||||||||||||||||||
Office |
361 | 236 | 598 | 277 | 61 | 1,533 | ||||||||||||||||||
Apartments |
188 | 143 | 203 | 29 | 15 | 578 | ||||||||||||||||||
Mixed use/other |
70 | 32 | 88 | 81 | 6 | 277 | ||||||||||||||||||
Total |
$ | 1,707 | $ | 953 | $ | 2,298 | $ | 784 | $ | 161 | $ | 5,903 | ||||||||||||
% of total |
29 | % | 16 | % | 39 | % | 13 | % | 3 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio |
2.14 | 1.73 | 2.13 | 1.55 | 1.14 | 1.97 | ||||||||||||||||||
(1) |
Included $8 million of impaired loans and $153 million of loans in good standing, with a total weighted-average loan-to-value of 144%, where borrowers continued to make timely payments and have no history of delinquencies or distress. |
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 453 | $ | 247 | $ | 900 | $ | 268 | $ | 30 | $ | 1,898 | ||||||||||||
Industrial |
445 | 332 | 642 | 261 | 27 | 1,707 | ||||||||||||||||||
Office |
364 | 281 | 546 | 283 | 116 | 1,590 | ||||||||||||||||||
Apartments |
164 | 110 | 321 | 31 | 15 | 641 | ||||||||||||||||||
Mixed use/other |
81 | 47 | 89 | 15 | 72 | 304 | ||||||||||||||||||
Total |
$ | 1,507 | $ | 1,017 | $ | 2,498 | $ | 858 | $ | 260 | $ | 6,140 | ||||||||||||
% of total |
25 | % | 17 | % | 40 | % | 14 | % | 4 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio |
2.28 | 1.89 | 2.16 | 1.19 | 2.26 | 2.01 | ||||||||||||||||||
(1) |
Included $260 million of loans in good standing, with a total weighted-average loan-to-value of 117%, where borrowers continued to make timely payments and have no history of delinquencies or distress. |
The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 110 | $ | 298 | $ | 388 | $ | 573 | $ | 408 | $ | 1,777 | ||||||||||||
Industrial |
187 | 149 | 343 | 643 | 305 | 1,627 | ||||||||||||||||||
Office |
148 | 172 | 309 | 494 | 326 | 1,449 | ||||||||||||||||||
Apartments |
9 | 51 | 90 | 287 | 141 | 578 | ||||||||||||||||||
Mixed use/other |
33 | 21 | 38 | 67 | 51 | 210 | ||||||||||||||||||
Total |
$ | 487 | $ | 691 | $ | 1,168 | $ | 2,064 | $ | 1,231 | $ | 5,641 | ||||||||||||
% of total |
9 | % | 12 | % | 21 | % | 36 | % | 22 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value |
83 | % | 71 | % | 65 | % | 60 | % | 45 | % | 61 | % | ||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 91 | $ | 322 | $ | 445 | $ | 595 | $ | 340 | $ | 1,793 | ||||||||||||
Industrial |
197 | 238 | 278 | 652 | 334 | 1,699 | ||||||||||||||||||
Office |
188 | 130 | 341 | 395 | 452 | 1,506 | ||||||||||||||||||
Apartments |
15 | 80 | 76 | 295 | 174 | 640 | ||||||||||||||||||
Mixed use/other |
22 | 23 | 53 | 61 | 59 | 218 | ||||||||||||||||||
Total |
$ | 513 | $ | 793 | $ | 1,193 | $ | 1,998 | $ | 1,359 | $ | 5,856 | ||||||||||||
% of total |
9 | % | 14 | % | 20 | % | 34 | % | 23 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value |
86 | % | 72 | % | 68 | % | 59 | % | 50 | % | 63 | % | ||||||||||||
The following tables set forth the debt service coverage ratio for floating rate commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | — | $ | — | $ | 1 | $ | — | $ | 104 | $ | 105 | ||||||||||||
Industrial |
— | — | — | — | 6 | 6 | ||||||||||||||||||
Office |
— | — | 8 | — | 76 | 84 | ||||||||||||||||||
Apartments |
— | — | — | — | — | — | ||||||||||||||||||
Mixed use/other |
— | — | — | — | 67 | 67 | ||||||||||||||||||
Total |
$ | — | $ | — | $ | 9 | $ | — | $ | 253 | $ | 262 | ||||||||||||
% of total |
— | % | — | % | 3 | % | — | % | 97 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value |
— | % | — | % | 54 | % | — | % | 68 | % | 67 | % | ||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | — | $ | — | $ | 1 | $ | — | $ | 104 | $ | 105 | ||||||||||||
Industrial |
— | — | — | 5 | 3 | 8 | ||||||||||||||||||
Office |
— | — | 8 | — | 76 | 84 | ||||||||||||||||||
Apartments |
— | — | — | — | 1 | 1 | ||||||||||||||||||
Mixed use/other |
— | — | — | — | 86 | 86 | ||||||||||||||||||
Total |
$ | — | $ | — | $ | 9 | $ | 5 | $ | 270 | $ | 284 | ||||||||||||
% of total |
— | % | — | % | 3 | % | 2 | % | 95 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value |
— | % | — | % | 54 | % | 44 | % | 74 | % | 72 | % | ||||||||||||
(f) Restricted Commercial Mortgage Loans Related To Securitization Entities
The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Property type: |
||||||||||||||||
Retail |
$ | 148 | 41 | % | $ | 161 | 38 | % | ||||||||
Industrial |
85 | 24 | 99 | 24 | ||||||||||||
Office |
66 | 18 | 86 | 21 | ||||||||||||
Apartments |
57 | 16 | 60 | 15 | ||||||||||||
Mixed use/other |
5 | 1 | 7 | 2 | ||||||||||||
Subtotal |
361 | 100 | % | 413 | 100 | % | ||||||||||
Allowance for losses |
(2 | ) | (2 | ) | ||||||||||||
Total |
$ | 359 | $ | 411 | ||||||||||||
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Geographic region: |
||||||||||||||||
South Atlantic |
$ | 132 | 37 | % | $ | 146 | 35 | % | ||||||||
Pacific |
62 | 17 | 74 | 18 | ||||||||||||
Middle Atlantic |
56 | 16 | 65 | 16 | ||||||||||||
East North Central |
36 | 10 | 42 | 10 | ||||||||||||
West North Central |
26 | 7 | 28 | 7 | ||||||||||||
Mountain |
22 | 6 | 28 | 7 | ||||||||||||
East South Central |
16 | 4 | 17 | 4 | ||||||||||||
West South Central |
11 | 3 | 12 | 3 | ||||||||||||
New England |
— | — | 1 | — | ||||||||||||
Subtotal |
361 | 100 | % | 413 | 100 | % | ||||||||||
Allowance for losses |
(2 | ) | (2 | ) | ||||||||||||
Total |
$ | 359 | $ | 411 | ||||||||||||
Of our restricted commercial mortgage loans as of September 30, 2012, $357 million were current and $4 million were 31 to 60 days past due. As of September 30, 2012, we did not have any restricted commercial mortgage loans past due for more than 90 days and still accruing interest. Of our restricted commercial mortgage loans as of December 31, 2011, $408 million were current, $2 million were 61 to 90 days past due and $3 million were past due for more than 90 days and still accruing interest.
As of September 30, 2012, the total recorded investment of restricted commercial mortgage loans of $361 million related to loans not individually impaired that were evaluated collectively for impairment. As of December 31, 2011, loans not individually impaired that were evaluated collectively for impairment were $412 million of the total recorded investment of restricted commercial mortgage loans of $413 million. There was no provision for credit losses recorded during the three or nine months ended September 30, 2012 or 2011 related to restricted commercial mortgage loans.
In evaluating the credit quality of restricted commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. The risks associated with restricted commercial mortgage loans can typically be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.
The following tables set forth the loan-to-value of restricted commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 134 | $ | 4 | $ | 7 | $ | — | $ | 3 | $ | 148 | ||||||||||||
Industrial |
80 | — | 3 | 2 | — | 85 | ||||||||||||||||||
Office |
51 | 8 | 1 | 6 | — | 66 | ||||||||||||||||||
Apartments |
32 | 4 | 21 | — | — | 57 | ||||||||||||||||||
Mixed use/other |
5 | — | — | — | — | 5 | ||||||||||||||||||
Total recorded investments |
$ | 302 | $ | 16 | $ | 32 | $ | 8 | $ | 3 | $ | 361 | ||||||||||||
% of total |
83 | % | 5 | % | 9 | % | 2 | % | 1 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio |
1.78 | 1.38 | 1.14 | 0.86 | 0.54 | 1.68 | ||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 147 | $ | 9 | $ | 2 | $ | — | $ | 3 | $ | 161 | ||||||||||||
Industrial |
87 | 5 | — | 5 | 2 | 99 | ||||||||||||||||||
Office |
63 | 9 | 6 | 6 | 2 | 86 | ||||||||||||||||||
Apartments |
34 | 3 | — | 23 | — | 60 | ||||||||||||||||||
Mixed use/other |
7 | — | — | — | — | 7 | ||||||||||||||||||
Total recorded investments |
$ | 338 | $ | 26 | $ | 8 | $ | 34 | $ | 7 | $ | 413 | ||||||||||||
% of total |
82 | % | 6 | % | 2 | % | 8 | % | 2 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio |
1.78 | 1.16 | 2.07 | 0.88 | 0.49 | 1.65 | ||||||||||||||||||
The following tables set forth the debt service coverage ratio for fixed rate restricted commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 6 | $ | 16 | $ | 36 | $ | 40 | $ | 50 | $ | 148 | ||||||||||||
Industrial |
12 | 4 | 14 | 38 | 17 | 85 | ||||||||||||||||||
Office |
5 | 23 | 14 | 12 | 12 | 66 | ||||||||||||||||||
Apartments |
— | 20 | 11 | 22 | 4 | 57 | ||||||||||||||||||
Mixed use/other |
— | — | — | 2 | 3 | 5 | ||||||||||||||||||
Total recorded investments |
$ | 23 | $ | 63 | $ | 75 | $ | 114 | $ | 86 | $ | 361 | ||||||||||||
% of total |
6 | % | 17 | % | 21 | % | 32 | % | 24 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value |
51 | % | 53 | % | 37 | % | 31 | % | 29 | % | 37 | % | ||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 5 | $ | 17 | $ | 49 | $ | 62 | $ | 28 | $ | 161 | ||||||||||||
Industrial |
15 | 10 | 21 | 23 | 30 | 99 | ||||||||||||||||||
Office |
12 | 23 | 4 | 37 | 10 | 86 | ||||||||||||||||||
Apartments |
12 | 14 | 7 | 22 | 5 | 60 | ||||||||||||||||||
Mixed use/other |
— | — | — | 2 | 5 | 7 | ||||||||||||||||||
Total recorded investments |
$ | 44 | $ | 64 | $ | 81 | $ | 146 | $ | 78 | $ | 413 | ||||||||||||
% of total |
10 | % | 16 | % | 20 | % | 35 | % | 19 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value |
73 | % | 48 | % | 39 | % | 36 | % | 28 | % | 41 | % | ||||||||||||
There were no floating rate restricted commercial mortgage loans as of September 30, 2012 or December 31, 2011.
(g) Restricted Other Invested Assets Related To Securitization Entities
We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss). The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables.
|
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.
The following table sets forth our positions in derivative instruments as of the dates indicated:
Derivative assets | Derivative liabilities | |||||||||||||||||||
Balance sheet classification |
Fair value | Balance sheet classification |
Fair value | |||||||||||||||||
(Amounts in millions) |
September 30, 2012 |
December 31, 2011 |
September 30, 2012 |
December 31, 2011 |
||||||||||||||||
Derivatives designated as hedges |
||||||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||
Interest rate swaps |
Other invested assets | $ | 546 | $ | 602 | Other liabilities | $ | 2 | $ | 1 | ||||||||||
Inflation indexed swaps |
Other invested assets | — | — | Other liabilities | 98 | 43 | ||||||||||||||
Foreign currency swaps |
Other invested assets | 1 | — | Other liabilities | 1 | — | ||||||||||||||
Forward bond purchase commitments |
Other invested assets | 68 | 47 | Other liabilities | — | — | ||||||||||||||
Total cash flow hedges |
615 | 649 | 101 | 44 | ||||||||||||||||
Fair value hedges: |
||||||||||||||||||||
Interest rate swaps |
Other invested assets | 19 | 43 | Other liabilities | — | 1 | ||||||||||||||
Foreign currency swaps |
Other invested assets | 29 | 32 | Other liabilities | — | — | ||||||||||||||
Total fair value hedges |
48 | 75 | — | 1 | ||||||||||||||||
Total derivatives designated as hedges |
663 | 724 | 101 | 45 | ||||||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
Interest rate swaps |
Other invested assets | 691 | 705 | Other liabilities | 352 | 374 | ||||||||||||||
Interest rate swaps related to securitization entities |
Restricted other invested assets |
— | — | Other liabilities | 29 | 28 | ||||||||||||||
Credit default swaps |
Other invested assets | 6 | 1 | Other liabilities | 9 | 59 | ||||||||||||||
Credit default swaps related to securitization entities |
Restricted other invested assets |
— | — | Other liabilities | 136 | 177 | ||||||||||||||
Equity index options |
Other invested assets | 24 | 39 | Other liabilities | — | — | ||||||||||||||
Financial futures |
Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||
Equity return swaps |
Other invested assets | — | 7 | Other liabilities | 7 | 4 | ||||||||||||||
Other foreign currency contracts |
Other invested assets | — | 9 | Other liabilities | 6 | 11 | ||||||||||||||
Reinsurance embedded derivatives (1) |
Other assets | 33 | 29 | Other liabilities | — | — | ||||||||||||||
GMWB embedded |
Reinsurance recoverable (2) |
11 | 16 | Policyholder account balances (3) |
380 | 492 | ||||||||||||||
Fixed index annuity embedded derivatives |
Other assets (4) | — | — | Policyholder account balances (4) |
21 | 4 | ||||||||||||||
Total derivatives not designated as hedges |
765 | 806 | 940 | 1,149 | ||||||||||||||||
Total derivatives |
$ | 1,428 | $ | 1,530 | $ | 1,041 | $ | 1,194 | ||||||||||||
(1) |
Represents embedded derivatives associated with certain reinsurance agreements. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities. |
(3) |
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(4) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB and fixed index annuity embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) |
Measurement | December 31, 2011 |
Additions | Maturities/ terminations |
September 30, 2012 |
|||||||||||||||
Derivatives designated as hedges |
||||||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||
Interest rate swaps |
Notional | $ | 12,399 | $ | — | $ | (2,082 | ) | $ | 10,317 | ||||||||||
Inflation indexed swaps |
Notional | 544 | 10 | — | 554 | |||||||||||||||
Foreign currency swaps |
Notional | — | 185 | (75 | ) | 110 | ||||||||||||||
Forward bond purchase commitments |
Notional | 504 | — | — | 504 | |||||||||||||||
Total cash flow hedges |
13,447 | 195 | (2,157 | ) | 11,485 | |||||||||||||||
Fair value hedges: |
||||||||||||||||||||
Interest rate swaps |
Notional | 1,039 | — | (314 | ) | 725 | ||||||||||||||
Foreign currency swaps |
Notional | 85 | — | — | 85 | |||||||||||||||
Total fair value hedges |
1,124 | — | (314 | ) | 810 | |||||||||||||||
Total derivatives designated as hedges |
14,571 | 195 | (2,471 | ) | 12,295 | |||||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
Interest rate swaps |
Notional | 7,200 | 2,530 | (2,332 | ) | 7,398 | ||||||||||||||
Interest rate swaps related to securitization entities |
Notional | 117 | — | (9 | ) | 108 | ||||||||||||||
Credit default swaps |
Notional | 1,110 | 100 | (230 | ) | 980 | ||||||||||||||
Credit default swaps related to securitization entities |
Notional | 314 | — | (2 | ) | 312 | ||||||||||||||
Equity index options |
Notional | 522 | 1,121 | (592 | ) | 1,051 | ||||||||||||||
Financial futures |
Notional | 2,924 | 4,228 | (5,110 | ) | 2,042 | ||||||||||||||
Equity return swaps |
Notional | 326 | 191 | (342 | ) | 175 | ||||||||||||||
Other foreign currency contracts |
Notional | 779 | 358 | (1,084 | ) | 53 | ||||||||||||||
Reinsurance embedded derivatives |
Notional | 228 | 53 | — | 281 | |||||||||||||||
Total derivatives not designated as hedges |
13,520 | 8,581 | (9,701 | ) | 12,400 | |||||||||||||||
Total derivatives |
$ | 28,091 | $ | 8,776 | $ | (12,172 | ) | $ | 24,695 | |||||||||||
(Number of policies) |
Measurement | December 31, 2011 |
Additions | Maturities/ terminations |
September 30, 2012 |
|||||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
GMWB embedded derivatives |
Policies | 47,714 | — | (2,010 | ) | 45,704 | ||||||||||||||
Fixed index annuity embedded derivatives |
Policies | 433 | 937 | (10 | ) | 1,360 |
We did not have any derivatives with counterparties that can be terminated at the option of the derivative counterparty as of September 30, 2012.
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (vi) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vii) other instruments to hedge the cash flows of various forecasted transactions.
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2012:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||
Interest rate swaps hedging assets |
$ | (83 | ) | $ | 9 | Net investment income | $ | (6 | ) | Net investment gains (losses) |
||||||
Interest rate swaps hedging assets |
— | 1 | Net investment gains (losses) | — | Net investment gains (losses) |
|||||||||||
Forward bond purchase commitments |
2 | — | Net investment income | — | Net investment gains (losses) |
|||||||||||
Inflation indexed swaps |
(23 | ) | 3 | Net investment income | — | Net investment gains (losses) |
||||||||||
Foreign currency swaps |
1 | — | Interest expense | — | Net investment gains (losses) |
|||||||||||
Total |
$ | (103 | ) | $ | 13 | $ | (6 | ) | ||||||||
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2011:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of
gain (loss) reclassified into net income (loss) |
Gain (loss) recognized in net income (loss) (1) |
Classification of
gain (loss) recognized in net income (loss) |
|||||||||||
Interest rate swaps hedging assets |
$ | 1,529 | $ | 9 | Net investment income |
$ | 49 | Net investment gains (losses) |
||||||||
Interest rate swaps hedging assets |
— | 2 | Net investment gains (losses) |
— | Net investment gains (losses) |
|||||||||||
Forward bond purchase commitments |
37 | — | Net investment income |
— | Net investment gains (losses) |
|||||||||||
Inflation indexed swaps |
19 | (3 | ) | Net investment income |
— | Net investment gains (losses) |
||||||||||
Total |
$ | 1,585 | $ | 8 | $ | 49 | ||||||||||
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2012:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain
into net
income |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain |
|||||||||||
Interest rate swaps hedging assets |
$ | 60 | $ | 28 | Net investment income | $ | (6) | Net investment gains (losses) | ||||||||
Interest rate swaps hedging assets |
— | 2 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||
Interest rate swaps hedging liabilities |
— | 1 | Interest expense | — | Net investment gains (losses) | |||||||||||
Forward bond purchase commitments |
22 | — | Net investment income | — | Net investment gains (losses) | |||||||||||
Inflation indexed |
(54 | ) | (6 | ) | Net investment income | — | Net investment gains (losses) | |||||||||
Foreign currency |
2 | — | Interest expense | — | Net investment gains (losses) | |||||||||||
Total |
$ | 30 | $ | 25 | $ | (6 | ) | |||||||||
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2011:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain |
|||||||||||
Interest rate swaps hedging assets |
$ | 1,568 | $ | 19 | Net investment income | $ | 49 | Net investment gains (losses) | ||||||||
Interest rate swaps hedging assets |
— | 2 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||
Interest rate swaps hedging liabilities |
— | 1 | Interest expense | — | Net investment gains (losses) | |||||||||||
Forward bond purchase commitments |
37 | — | Net investment income | — | Net investment gains (losses) | |||||||||||
Inflation indexed swaps |
(8 | ) | (24 | ) | Net investment income | — | Net investment gains (losses) | |||||||||
Foreign currency swaps |
4 | (5 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||
Total |
$ | 1,601 | $ | (7 | ) | $ | 49 | |||||||||
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following tables provide a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:
Three months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Derivatives qualifying as effective accounting hedges as of July 1 |
$ | 2,087 | $ | 943 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $31 and $(563) |
(72 | ) | 1,022 | |||||
Reclassification to net (income) loss, net of deferred taxes of $9 and $3 |
(4 | ) | (5 | ) | ||||
Derivatives qualifying as effective accounting hedges as of September 30 |
$ | 2,011 | $ | 1,960 | ||||
Nine months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Derivatives qualifying as effective accounting hedges as of January 1 |
$ | 2,009 | $ | 924 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $(12) and $(569) |
18 | 1,032 | ||||||
Reclassification to net (income) loss, net of deferred taxes of $9 and $(3) |
(16 | ) | 4 | |||||
Derivatives qualifying as effective accounting hedges as of September 30 |
$ | 2,011 | $ | 1,960 | ||||
The total of derivatives designated as cash flow hedges of $2,011 million, net of taxes, recorded in stockholders’ equity as of September 30, 2012 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $33 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the nine months ended September 30, 2012 in connection with forecasted transactions that were no longer considered probable of occurring.
Fair Value Hedges
Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2012:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | — | Net investment gains (losses) |
$ | — | Net investment income |
$ | — | Net investment gains (losses) |
|||||||||
Interest rate swaps hedging liabilities |
(4 | ) | Net investment gains (losses) |
8 | Interest credited | 4 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
— | Net investment gains (losses) |
1 | Interest credited | — | Net investment gains (losses) |
||||||||||||
Total |
$ | (4 | ) | $ | 9 | $ | 4 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2011:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | 1 | Net investment gains (losses) |
$ | (2 | ) | Net investment income |
$ | (1 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging liabilities |
(10 | ) | Net investment gains (losses) |
16 | Interest credited | 10 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
(9 | ) | Net investment gains (losses) |
1 | Interest credited | 10 | Net investment gains (losses) |
|||||||||||
Total |
$ | (18 | ) | $ | 15 | $ | 19 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2012:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | 1 | Net investment gains (losses) |
$ | (3 | ) | Net investment income |
$ | (1 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging liabilities |
(23 | ) | Net investment gains (losses) |
29 | Interest credited | 23 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
(3 | ) | Net investment gains (losses) |
2 | Interest credited | 3 | Net investment gains (losses) |
|||||||||||
Total |
$ | (25 | ) | $ | 28 | $ | 25 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2011:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | 3 | Net investment gains (losses) |
$ | (7 | ) | Net investment income |
$ | (3 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging liabilities |
(39 | ) | Net investment gains (losses) |
53 | Interest credited | 39 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
2 | Net investment gains (losses) |
2 | Interest credited | (2 | ) | Net investment gains (losses) |
|||||||||||
Total |
$ | (34 | ) | $ | 48 | $ | 34 | |||||||||||
The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.
Derivatives Not Designated As Hedges
We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency forward contracts to mitigate currency risk associated with future dividends and other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options and credit default swaps to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended September 30, |
Classification of gain (loss) recognized in net income (loss) |
|||||||||
(Amounts in millions) |
2012 | 2011 | ||||||||
Interest rate swaps |
$ | 1 | $ | 9 | Net investment gains (losses) | |||||
Interest rate swaps related to securitization entities |
(1 | ) | (12 | ) | Net investment gains (losses) | |||||
Credit default swaps |
25 | (70 | ) | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities |
20 | (54 | ) | Net investment gains (losses) | ||||||
Equity index options |
(17 | ) | 59 | Net investment gains (losses) | ||||||
Financial futures |
(70 | ) | 266 | Net investment gains (losses) | ||||||
Equity return swaps |
(11 | ) | 22 | Net investment gains (losses) | ||||||
Other foreign currency contracts |
(2 | ) | 13 | Net investment gains (losses) | ||||||
Reinsurance embedded derivatives |
(1 | ) | 27 | Net investment gains (losses) | ||||||
GMWB embedded derivatives |
79 | (454 | ) | Net investment gains (losses) | ||||||
Fixed index annuity embedded derivatives |
(1 | ) | 1 | Net investment gains (losses) | ||||||
Total derivatives not designated as hedges |
$ | 22 | $ | (193 | ) | |||||
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Nine months ended September 30, |
Classification of gain (loss) recognized in net income (loss) |
|||||||||
(Amounts in millions) |
2012 | 2011 | ||||||||
Interest rate swaps |
$ | 18 | $ | 13 | Net investment gains (losses) | |||||
Interest rate swaps related to securitization entities |
(4 | ) | (15 | ) | Net investment gains (losses) | |||||
Credit default swaps |
47 | (67 | ) | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities |
43 | (49 | ) | Net investment gains (losses) | ||||||
Equity index options |
(46 | ) | 31 | Net investment gains (losses) | ||||||
Financial futures |
(109 | ) | 261 | Net investment gains (losses) | ||||||
Equity return swaps |
(25 | ) | 12 | Net investment gains (losses) | ||||||
Other foreign currency contracts |
(19 | ) | — | Net investment gains (losses) | ||||||
Reinsurance embedded derivatives |
4 | 26 | Net investment gains (losses) | |||||||
GMWB embedded derivatives |
132 | (428 | ) | Net investment gains (losses) | ||||||
Fixed index annuity embedded derivatives |
(2 | ) | 1 | Net investment gains (losses) | ||||||
Total derivatives not designated as hedges |
$ | 39 | $ | (215 | ) | |||||
Derivative Counterparty Credit Risk
As of September 30, 2012 and December 31, 2011, net fair value assets by counterparty totaled $937 million and $1,027 million, respectively. As of September 30, 2012 and December 31, 2011, net fair value liabilities by counterparty totaled $193 million and $240 million, respectively. As of September 30, 2012 and December 31, 2011, we retained collateral of $1,010 million and $1,023 million, respectively, related to these agreements, including over collateralization of $95 million and $50 million, respectively, from certain counterparties. As of September 30, 2012 and December 31, 2011, we posted $24 million and $28 million, respectively, of collateral to derivative counterparties, including over collateralization of $1 million and $11 million, respectively. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.
Except for derivatives related to securitization entities, all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of September 30, 2012 and December 31, 2011, we could have been allowed to claim up to $22 million and $54 million, respectively, from counterparties and required to disburse up to $5 million and $18 million, respectively. This represented the net fair value of gains and losses by counterparty, less available collateral held, and did not include any fair value gains or losses for derivatives related to securitization entities.
Credit Derivatives
We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.
In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidated in 2010. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||||||||
Reference entity credit rating and maturity: |
||||||||||||||||||||||||
AAA |
||||||||||||||||||||||||
Matures in less than one year |
$ | 5 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Matures after one year through five years |
— | — | — | 5 | — | — | ||||||||||||||||||
AA |
||||||||||||||||||||||||
Matures in less than one year |
6 | — | — | — | — | — | ||||||||||||||||||
Matures after one year through five years |
— | — | — | 6 | — | — | ||||||||||||||||||
Matures after five years through ten years |
5 | — | — | 5 | — | — | ||||||||||||||||||
A |
||||||||||||||||||||||||
Matures in less than one year |
37 | — | — | — | — | — | ||||||||||||||||||
Matures after one year through five years |
— | — | — | 37 | — | — | ||||||||||||||||||
Matures after five years through ten years |
10 | — | — | 10 | — | 1 | ||||||||||||||||||
BBB |
||||||||||||||||||||||||
Matures in less than one year |
68 | 1 | — | — | — | — | ||||||||||||||||||
Matures after one year through five years |
— | — | — | 68 | 1 | — | ||||||||||||||||||
Matures after five years through ten years |
24 | — | — | 24 | — | 1 | ||||||||||||||||||
Total credit default swaps on single name reference entities |
$ | 155 | $ | 1 | $ | — | $ | 155 | $ | 1 | $ | 2 | ||||||||||||
The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||||||||
Original index tranche attachment/detachment point and maturity: |
||||||||||||||||||||||||
7% – 15% matures after one year through five years (1) |
$ | 100 | $ | — | $ | 2 | $ | — | $ | — | $ | — | ||||||||||||
9% – 12% matures in less than one year (2) |
50 | — | — | — | — | — | ||||||||||||||||||
9% – 12% matures after one year through five years (2) |
250 | — | 5 | 300 | — | 27 | ||||||||||||||||||
10% – 15% matures after one year through five years (3) |
250 | 4 | — | 250 | — | — | ||||||||||||||||||
12% – 22% matures after five years through ten years (4) |
48 | — | 2 | 248 | — | 28 | ||||||||||||||||||
15% – 30% matures after five years through ten years (5) |
127 | 1 | — | 127 | — | 2 | ||||||||||||||||||
Total credit default swap index tranches |
825 | 5 | 9 | 925 | — | 57 | ||||||||||||||||||
Customized credit default swap index tranches related to securitization entities: |
||||||||||||||||||||||||
Portion backing third-party
borrowings maturing |
12 | — | 5 | 14 | — | 7 | ||||||||||||||||||
Portion backing our interest maturing 2017 (7) |
300 | — | 131 | 300 | — | 170 | ||||||||||||||||||
Total customized credit default swap index tranches related to securitization entities |
312 | — | 136 | 314 | — | 177 | ||||||||||||||||||
Total credit default swaps on index tranches |
$ | 1,137 | $ | 5 | $ | 145 | $ | 1,239 | $ | — | $ | 234 | ||||||||||||
(1) |
The current attachment/detachment as of September 30, 2012 was 7% – 15%. |
(2) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 9% – 12%. |
(3) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 10% – 15%. |
(4) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 12% – 22%. |
(5) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 14.8% – 30.3%. |
(6) |
Original notional value was $39 million. |
(7) |
Original notional value was $300 million. |
|
(6) Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.
The basis on which we estimate fair value is as follows:
Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.
Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.
Other invested assets. Based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the related instrument. Primarily represents short-term investments and limited partnerships accounted for under the cost method. The fair value of short-term investments typically does not include significant unobservable inputs and approximate our amortized cost basis. As a result, short-term investments are classified as Level 2. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.
Long-term borrowings. We utilize available market data when determining fair value of long-term borrowings issued in the U.S. and Canada, which includes data on recent trades for the same or similar financial instruments. Accordingly, these instruments are classified as Level 2 measurements. In cases where market data is not available such as our Australian borrowings, we use broker quotes for which we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify these borrowings where fair value is based on our consideration of broker quotes as Level 3 measurements.
Non-recourse funding obligations. We use an internal model to determine fair value using the current floating rate coupon and expected life/final maturity of the instrument discounted using the floating rate index and current market spread assumption, which is estimated based on recent transactions for these instruments or similar instruments as well as other market information or broker provided data. Given these instruments are private and very little market activity exists, our current market spread assumption is considered to have significant unobservable inputs in calculating fair value and, therefore, results in the fair value of these instruments being classified as Level 3.
Borrowings related to securitization entities. Based on market quotes or comparable market transactions. Some of these borrowings are publicly traded debt securities and are classified as Level 2. Certain borrowings are not publicly traded and are classified as Level 3.
Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder behavior and current market rate assumptions used to discount the expected future cash flows, we classify these instruments as Level 3 except for certain funding agreement-backed notes that are traded in the marketplace as a security and are classified as Level 2.
The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Notional amount |
Carrying amount |
Fair value | |||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Commercial mortgage loans |
$ | (1) | $ | 5,861 | $ | — | $ | — | $ | 6,380 | $ | 6,380 | ||||||||||||
Restricted commercial mortgage loans |
(1) | 359 | — | — | 410 | 410 | ||||||||||||||||||
Other invested assets |
(1) | 250 | — | 134 | 123 | 257 | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Long-term borrowings (2) |
(1) | 4,880 | — | 4,703 | 146 | 4,849 | ||||||||||||||||||
Non-recourse funding obligations (2) |
(1) | 2,325 | — | — | 1,567 | 1,567 | ||||||||||||||||||
Borrowings related to securitization entities |
(1) | 293 | — | 253 | 71 | 324 | ||||||||||||||||||
Investment contracts |
(1) | 18,581 | — | 1,027 | 18,689 | 19,716 | ||||||||||||||||||
Other firm commitments: |
||||||||||||||||||||||||
Commitments to fund limited partnerships |
57 | — | — | — | — | — | ||||||||||||||||||
Ordinary course of business lending commitments |
98 | — | — | — | — | — |
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Notional amount |
Carrying amount |
Fair value | |||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Commercial mortgage loans |
$ | (1) | $ | 6,092 | $ | — | $ | — | $ | 6,500 | $ | 6,500 | ||||||||||||
Restricted commercial mortgage loans |
(1) | 411 | — | — | 461 | 461 | ||||||||||||||||||
Other invested assets |
(1) | 786 | — | 658 | 137 | 795 | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Long-term borrowings (2) |
(1) | 4,726 | — | 4,214 | 139 | 4,353 | ||||||||||||||||||
Non-recourse funding obligations (2) |
(1) | 3,256 | — | — | 2,160 | 2,160 | ||||||||||||||||||
Borrowings related to securitization entities |
(1) | 348 | — | 287 | 88 | 375 | ||||||||||||||||||
Investment contracts |
(1) | 18,880 | — | 1,356 | 18,325 | 19,681 | ||||||||||||||||||
Other firm commitments: |
||||||||||||||||||||||||
Commitments to fund limited partnerships |
78 | — | — | — | — | — | ||||||||||||||||||
Ordinary course of business lending commitments |
9 | — | — | — | — | — |
(1) |
These financial instruments do not have notional amounts. |
(2) |
See note 8 for additional information related to borrowings. |
Recurring Fair Value Measurements
We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.
Fixed maturity, equity and trading securities
The valuations of fixed maturity, equity and trading securities are determined using a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information.
We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services (“pricing services”) as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. Additionally, we evaluate significant changes in fair value each month to further aide in our review of the accuracy our fair value measurements and understanding of changes in fair value, where more detailed reviews are performed by the asset managers responsible for the related asset class associated with the security being reviewed.
In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models.
For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.
For private fixed maturity securities, we utilize an internal model to determine fair value and utilize public bond spreads by sector, rating and maturity to develop the market rate that would be utilized for a similar public bond. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. In certain instances, we utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. We assign each security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized and whether external ratings are available for our private placement to determine whether the spreads utilized would be considered observable inputs. During the second quarter of 2012, we began classifying private securities without an external rating as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities. To determine the significance of unobservable inputs, we calculate the impact on the valuation from the unobservable input and will classify a security as Level 3 when the impact on the valuation exceeds 10%.
For broker quotes, we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.
For remaining securities priced using internal models, we maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.
The following tables summarize the primary sources of data considered when determining fair value of each class of fixed maturity securities as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: |
||||||||||||||||
Pricing services |
$ | 5,494 | $ | — | $ | 5,494 | $ | — | ||||||||
Internal models |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. government, agencies and government-sponsored enterprises |
5,503 | — | 5,494 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Tax-exempt: |
||||||||||||||||
Pricing services |
302 | — | 302 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total tax-exempt |
302 | — | 302 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Government—non-U.S.: |
||||||||||||||||
Pricing services |
2,566 | — | 2,566 | — | ||||||||||||
Internal models |
8 | — | — | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total government—non-U.S. |
2,574 | — | 2,566 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. corporate: |
||||||||||||||||
Pricing services |
23,298 | — | 23,298 | — | ||||||||||||
Broker quotes |
138 | — | — | 138 | ||||||||||||
Internal models |
2,870 | — | 259 | 2,611 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. corporate |
26,306 | — | 23,557 | 2,749 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Corporate—non-U.S.: |
||||||||||||||||
Pricing services |
13,308 | — | 13,308 | — | ||||||||||||
Broker quotes |
62 | — | — | 62 | ||||||||||||
Internal models |
1,998 | — | 151 | 1,847 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate—non-U.S. |
15,368 | — | 13,459 | 1,909 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential mortgage-backed: |
||||||||||||||||
Pricing services |
5,995 | — | 5,995 | — | ||||||||||||
Broker quotes |
67 | — | — | 67 | ||||||||||||
Internal models |
57 | — | — | 57 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total residential mortgage-backed |
6,119 | — | 5,995 | 124 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Commercial mortgage-backed: |
||||||||||||||||
Pricing services |
3,248 | — | 3,248 | — | ||||||||||||
Broker quotes |
15 | — | — | 15 | ||||||||||||
Internal models |
23 | — | 5 | 18 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage-backed |
3,286 | — | 3,253 | 33 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other asset-backed: |
||||||||||||||||
Pricing services |
2,070 | — | 2,070 | — | ||||||||||||
Broker quotes |
643 | — | — | 643 | ||||||||||||
Internal models |
43 | — | 5 | 38 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other asset-backed |
2,756 | — | 2,075 | 681 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 62,214 | $ | — | $ | 56,701 | $ | 5,513 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: |
||||||||||||||||
Pricing services |
$ | 4,850 | $ | — | $ | 4,850 | $ | — | ||||||||
Internal models |
13 | — | — | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. government, agencies and government-sponsored enterprises |
4,863 | — | 4,850 | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Tax-exempt: |
||||||||||||||||
Pricing services |
503 | — | 503 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total tax-exempt |
503 | — | 503 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Government—non-U.S.: |
||||||||||||||||
Pricing services |
2,201 | — | 2,201 | — | ||||||||||||
Internal models |
10 | — | — | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total government—non-U.S. |
2,211 | — | 2,201 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. corporate: |
||||||||||||||||
Pricing services |
22,168 | — | 22,168 | — | ||||||||||||
Broker quotes |
250 | — | — | 250 | ||||||||||||
Internal models |
2,840 | — | 579 | 2,261 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. corporate |
25,258 | — | 22,747 | 2,511 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Corporate—non-U.S.: |
||||||||||||||||
Pricing services |
11,925 | — | 11,925 | — | ||||||||||||
Broker quotes |
78 | — | — | 78 | ||||||||||||
Internal models |
1,754 | — | 548 | 1,206 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate—non-U.S. |
13,757 | — | 12,473 | 1,284 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential mortgage-backed: |
||||||||||||||||
Pricing services |
5,600 | — | 5,600 | — | ||||||||||||
Broker quotes |
36 | — | — | 36 | ||||||||||||
Internal models |
59 | — | — | 59 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total residential mortgage-backed |
5,695 | — | 5,600 | 95 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Commercial mortgage-backed: |
||||||||||||||||
Pricing services |
3,361 | — | 3,361 | — | ||||||||||||
Broker quotes |
15 | — | — | 15 | ||||||||||||
Internal models |
24 | — | — | 24 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage-backed |
3,400 | — | 3,361 | 39 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other asset-backed: |
||||||||||||||||
Pricing services |
2,328 | — | 2,328 | — | ||||||||||||
Broker quotes |
271 | — | — | 271 | ||||||||||||
Internal models |
9 | — | 9 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other asset-backed |
2,608 | — | 2,337 | 271 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 58,295 | $ | — | $ | 54,072 | $ | 4,223 | ||||||||
|
|
|
|
|
|
|
|
The following tables summarize the primary sources of data considered when determining fair value of equity securities as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 425 | $ | 424 | $ | 1 | $ | — | ||||||||
Broker quotes |
3 | — | — | 3 | ||||||||||||
Internal models |
96 | — | — | 96 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities |
$ | 524 | $ | 424 | $ | 1 | $ | 99 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 263 | $ | 261 | $ | 2 | $ | — | ||||||||
Broker quotes |
6 | — | — | 6 | ||||||||||||
Internal models |
92 | — | — | 92 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities |
$ | 361 | $ | 261 | $ | 2 | $ | 98 | ||||||||
|
|
|
|
|
|
|
|
The following tables summarize the primary sources of data considered when determining fair value of trading securities as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 496 | $ | — | $ | 496 | $ | — | ||||||||
Broker quotes |
194 | — | — | 194 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading securities |
$ | 690 | $ | — | $ | 496 | $ | 194 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 524 | $ | — | $ | 524 | $ | — | ||||||||
Broker quotes |
264 | — | — | 264 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading securities |
$ | 788 | $ | — | $ | 524 | $ | 264 | ||||||||
|
|
|
|
|
|
|
|
Restricted other invested assets related to securitization entities
We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments, which is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.
Securities lending and derivative counterparty collateral
The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.
Contingent consideration
We have certain contingent purchase price payments and receivables related to acquisitions and sales that are recorded at fair value each period. Fair value is determined using an income approach whereby we project the expected performance of the business and compare our projections of the relevant performance metric to the thresholds established in the purchase or sale agreement to determine our expected payments or receipts. We then discount these expected amounts to calculate the fair value as of the valuation date. We evaluate the underlying projections used in determining fair value each period and update these underlying projections when there have been significant changes in our expectations of the future business performance. The inputs used to determine the discount rate and expected payments or receipts are primarily based on significant unobservable inputs and result in the fair value of the contingent consideration being classified as Level 3. An increase in the discount rate or a decrease in expected payments or receipts will result in a decrease in the fair value of contingent consideration.
Separate account assets
The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.
Derivatives
We consider counterparty collateral arrangements and rights of set-off when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we do not record any incremental adjustment for our non-performance risk or the non-performance risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach using internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.
Interest rate swaps. The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates. The interest rate volatility input used to value these options would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3. These options to terminate the swap by the counterparty are based on forward interest rate swap curves and volatility. As interest rate volatility increases, our valuation of the derivative changes unfavorably.
Interest rate swaps related to securitization entities. The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.
Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, the current consumer price index and the forward consumer price index curve, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.
Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3. As credit spreads widen for the underlying issuers comprising the index, the change in our valuation of these credit default swaps will be unfavorable.
Credit default swaps related to securitization entities. Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3. As credit spreads widen for the underlying issuers comprising the customized index, the change in our valuation of these credit default swaps will be unfavorable.
Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As equity index volatility increases, our valuation of these options changes favorably.
Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.
Equity return swaps. The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Forward bond purchase commitments. The valuation of forward bond purchase commitments is determined using an income approach. The primary input into the valuation represents the current bond prices and interest rates, which are generally considered an observable input, and results in the derivative being classified as Level 2.
Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility, foreign equity index volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.
Reinsurance embedded derivatives
We have certain reinsurance agreements that result in a reinsurance counterparty holding assets for our benefit where this feature is considered an embedded derivative requiring bifurcation. As a result, we measure the embedded derivatives at fair value with changes in fair value being recorded in income (loss). Fair value is determined by comparing the fair value and cost basis of the underlying assets. The underlying assets are primarily comprised of highly rated investments and result in the fair value of the embedded derivatives being classified as Level 2.
GMWB embedded derivatives
We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.
For GMWB liabilities, non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the non-performance risk of the GMWB liabilities. As of September 30, 2012 and December 31, 2011, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $97 million and $109 million, respectively.
To determine the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. In determining the appropriate discount rate to incorporate non-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.
For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.
Equity index and fund correlations are determined based on historical price observations for the fund and equity index.
For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.
We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and non-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in non-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.
We evaluate the inputs and methodologies used to determine fair value based on how we expect a market participant would determine exit value. As stated above, there is no exit market or market participants for the GMWB embedded derivatives. Accordingly, we evaluate our inputs and resulting fair value based on a hypothetical exit market and hypothetical market participants. A hypothetical exit market could be viewed as a transaction that would closely resemble reinsurance. While reinsurance transactions for this type of product are not an observable input, we consider this type of hypothetical exit market, as appropriate, when evaluating our inputs and determining that our inputs are consistent with that of a hypothetical market participant.
Fixed index annuity embedded derivatives
We offer fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate nonperformance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.
Borrowings related to securitization entities
We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.
The following tables set forth our assets and liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets |
||||||||||||||||
Investments: |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 5,503 | $ | — | $ | 5,494 | $ | 9 | ||||||||
Tax-exempt |
302 | — | 302 | — | ||||||||||||
Government—non-U.S. |
2,574 | — | 2,566 | 8 | ||||||||||||
U.S. corporate |
26,306 | — | 23,557 | 2,749 | ||||||||||||
Corporate—non-U.S. |
15,368 | — | 13,459 | 1,909 | ||||||||||||
Residential mortgage-backed |
6,119 | — | 5,995 | 124 | ||||||||||||
Commercial mortgage-backed |
3,286 | — | 3,253 | 33 | ||||||||||||
Other asset-backed |
2,756 | — | 2,075 | 681 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
62,214 | — | 56,701 | 5,513 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities |
524 | 424 | 1 | 99 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other invested assets: |
||||||||||||||||
Trading securities |
690 | — | 496 | 194 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
1,256 | — | 1,253 | 3 | ||||||||||||
Foreign currency swaps |
30 | — | 30 | — | ||||||||||||
Credit default swaps |
6 | — | 1 | 5 | ||||||||||||
Equity index options |
24 | — | — | 24 | ||||||||||||
Forward bond purchase commitments |
68 | — | 68 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
1,384 | — | 1,352 | 32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities lending collateral |
181 | — | 181 | — | ||||||||||||
Derivatives counterparty collateral |
662 | — | 662 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other invested assets |
2,917 | — | 2,691 | 226 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Restricted other invested assets related to securitization entities |
393 | — | 199 | 194 | ||||||||||||
Other assets: |
||||||||||||||||
Reinsurance embedded derivatives (1) |
33 | — | 33 | — | ||||||||||||
Contingent receivable |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other assets |
42 | — | 33 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reinsurance recoverable (2) |
11 | — | — | 11 | ||||||||||||
Separate account assets |
10,166 | 10,166 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 76,267 | $ | 10,590 | $ | 59,625 | $ | 6,052 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Policyholder account balances: |
||||||||||||||||
GMWB embedded derivatives (3) |
$ | 380 | $ | — | $ | — | $ | 380 | ||||||||
Fixed index annuity embedded derivatives (4) |
21 | — | — | 21 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total policyholder account balances |
401 | — | — | 401 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other liabilities: |
||||||||||||||||
Contingent purchase price |
31 | — | — | 31 | ||||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
354 | — | 354 | — | ||||||||||||
Interest rate swaps related to securitization entities |
29 | — | 29 | — | ||||||||||||
Inflation indexed swaps |
98 | — | 98 | — | ||||||||||||
Foreign currency swaps |
1 | — | 1 | — | ||||||||||||
Credit default swaps |
9 | — | — | 9 | ||||||||||||
Credit default swaps related to securitization entities |
136 | — | — | 136 | ||||||||||||
Equity return swaps |
7 | — | 7 | — | ||||||||||||
Other foreign currency contracts |
6 | — | 6 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
640 | — | 495 | 145 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other liabilities |
671 | — | 495 | 176 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Borrowings related to securitization entities |
60 | — | — | 60 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,132 | $ | — | $ | 495 | $ | 637 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with certain reinsurance agreements. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(3) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(4) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets |
||||||||||||||||
Investments: |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 4,863 | $ | — | $ | 4,850 | $ | 13 | ||||||||
Tax-exempt |
503 | — | 503 | — | ||||||||||||
Government—non-U.S. |
2,211 | — | 2,201 | 10 | ||||||||||||
U.S. corporate |
25,258 | — | 22,747 | 2,511 | ||||||||||||
Corporate—non-U.S. |
13,757 | — | 12,473 | 1,284 | ||||||||||||
Residential mortgage-backed |
5,695 | — | 5,600 | 95 | ||||||||||||
Commercial mortgage-backed |
3,400 | — | 3,361 | 39 | ||||||||||||
Other asset-backed |
2,608 | — | 2,337 | 271 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
58,295 | — | 54,072 | 4,223 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities |
361 | 261 | 2 | 98 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other invested assets: |
||||||||||||||||
Trading securities |
788 | — | 524 | 264 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
1,350 | — | 1,345 | 5 | ||||||||||||
Foreign currency swaps |
32 | — | 32 | — | ||||||||||||
Credit default swaps |
1 | — | 1 | — | ||||||||||||
Equity index options |
39 | — | — | 39 | ||||||||||||
Equity return swaps |
7 | — | 7 | — | ||||||||||||
Forward bond purchase commitments |
47 | — | 47 | — | ||||||||||||
Other foreign currency contracts |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
1,485 | — | 1,432 | 53 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities lending collateral |
406 | — | 406 | — | ||||||||||||
Derivatives counterparty collateral |
323 | — | 323 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other invested assets |
3,002 | — | 2,685 | 317 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Restricted other invested assets related to securitization entities |
376 | — | 200 | 176 | ||||||||||||
Other assets (1) |
29 | — | 29 | — | ||||||||||||
Reinsurance recoverable (2) |
16 | — | — | 16 | ||||||||||||
Separate account assets |
10,122 | 10,122 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 72,201 | $ | 10,383 | $ | 56,988 | $ | 4,830 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Policyholder account balances: |
||||||||||||||||
GMWB embedded derivatives (3) |
$ | 492 | $ | — | $ | — | $ | 492 | ||||||||
Fixed index annuity embedded derivatives (4) |
4 | — | — | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total policyholder account balances |
496 | — | — | 496 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other liabilities: |
||||||||||||||||
Contingent purchase price |
46 | — | — | 46 | ||||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
376 | — | 376 | — | ||||||||||||
Interest rate swaps related to securitization entities |
28 | — | 28 | — | ||||||||||||
Inflation indexed swaps |
43 | — | 43 | — | ||||||||||||
Credit default swaps |
59 | — | 2 | 57 | ||||||||||||
Credit default swaps related to securitization entities |
177 | — | — | 177 | ||||||||||||
Equity return swaps |
4 | — | 4 | — | ||||||||||||
Other foreign currency contracts |
11 | — | 11 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
698 | — | 464 | 234 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other liabilities |
744 | — | 464 | 280 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Borrowings related to securitization entities |
48 | — | — | 48 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,288 | $ | — | $ | 464 | $ | 824 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with certain reinsurance agreements. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(3) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(4) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers between levels at the beginning fair value for the reporting period in which the changes occur. Given the types of assets classified as Level 1, which primarily represents mutual fund investments, we typically do not have any transfers between Level 1 and Level 2 measurement categories and did not have any such transfers during any period presented.
Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of July 1, 2012 |
Total realized
and unrealized gains (losses) |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 10 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | 9 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
9 | — | — | — | — | — | (1 | ) | — | — | 8 | — | ||||||||||||||||||||||||||||||||
U.S. corporate (1) |
2,849 | 5 | 34 | 58 | (4 | ) | — | (92 | ) | 36 | (137 | ) | 2,749 | 4 | ||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
1,864 | 2 | 17 | 106 | — | — | (88 | ) | 8 | — | 1,909 | — | ||||||||||||||||||||||||||||||||
Residential mortgage- backed |
120 | — | 3 | 12 | (12 | ) | — | (9 | ) | 13 | (3 | ) | 124 | — | ||||||||||||||||||||||||||||||
Commercial mortgage- backed |
33 | — | — | — | — | — | — | — | — | 33 | — | |||||||||||||||||||||||||||||||||
Other asset-backed |
597 | — | 10 | 66 | — | — | (25 | ) | 59 | (26 | ) | 681 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total fixed maturity securities |
5,482 | 7 | 64 | 242 | (16 | ) | — | (215 | ) | 116 | (167 | ) | 5,513 | 4 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Equity securities |
96 | — | — | 4 | (1 | ) | — | — | — | — | 99 | — | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
284 | 6 | — | — | (63 | ) | — | (2 | ) | — | (31 | ) | 194 | 5 | ||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
3 | — | — | — | — | — | — | — | — | 3 | — | |||||||||||||||||||||||||||||||||
Credit default swaps |
2 | 4 | — | — | — | — | (1 | ) | — | — | 5 | 4 | ||||||||||||||||||||||||||||||||
Equity index options |
27 | (17 | ) | — | 14 | — | — | — | — | — | 24 | (17 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total derivative assets |
32 | (13 | ) | — | 14 | — | — | (1 | ) | — | — | 32 | (13 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total other invested assets |
316 | (7 | ) | — | 14 | (63 | ) | — | (3 | ) | — | (31 | ) | 226 | (8 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
192 | 2 | — | — | — | — | — | — | — | 194 | 1 | |||||||||||||||||||||||||||||||||
Other assets: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent receivable |
17 | (8 | ) | — | — | — | — | — | — | — | 9 | (8 | ) | |||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
15 | (4 | ) | — | — | — | — | — | — | — | 11 | (4 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total Level 3 assets |
$ | 6,118 | $ | (10 | ) | $ | 64 | $ | 260 | $ | (80 | ) | $ | — | $ | (218 | ) | $ | 116 | $ | (198 | ) | $ | 6,052 | $ | (15 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(Amounts in millions) |
Beginning balance as of July 1, 2011 |
Total realized
and unrealized gains (losses) |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 13 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (12 | ) | $ | 1 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||
U.S. corporate (1) |
949 | (21 | ) | 39 | 41 | — | — | (7 | ) | 382 | (33 | ) | 1,350 | (21 | ) | |||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
371 | (15 | ) | 30 | — | — | — | (1 | ) | 20 | (35 | ) | 370 | (16 | ) | |||||||||||||||||||||||||||||
Residential mortgage- backed |
124 | 1 | (7 | ) | — | — | — | (12 | ) | 3 | (2 | ) | 107 | 1 | ||||||||||||||||||||||||||||||
Commercial mortgage- backed |
43 | — | (1 | ) | — | — | — | (2 | ) | 1 | — | 41 | — | |||||||||||||||||||||||||||||||
Other asset-backed |
265 | — | (4 | ) | — | — | — | (6 | ) | — | — | 255 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total fixed maturity securities |
1,766 | (35 | ) | 57 | 41 | — | — | (28 | ) | 406 | (82 | ) | 2,125 | (36 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Equity securitie |
106 | — | (1 | ) | — | (5 | ) | — | — | — | — | 100 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
291 | (12 | ) | — | — | — | — | (5 | ) | — | — | 274 | (12 | ) | ||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
4 | 3 | — | — | — | — | (1 | ) | — | — | 6 | 3 | ||||||||||||||||||||||||||||||||
Credit default swaps |
4 | (4 | ) | — | — | — | — | — | — | — | — | (4 | ) | |||||||||||||||||||||||||||||||
Equity index options |
40 | 58 | — | — | — | — | (36 | ) | — | — | 62 | 37 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total derivative assets |
48 | 57 | — | — | — | — | (37 | ) | — | — | 68 | 36 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total other invested. assets |
339 | 45 | — | — | — | — | (42 | ) | — | — | 342 | 24 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
175 | (1 | ) | — | — | — | — | — | — | — | 174 | (1 | ) | |||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
(5 | ) | 26 | — | — | — | — | — | — | — | 21 | 26 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total Level 3 assets |
$ | 2,381 | $ | 35 | $ | 56 | $ | 41 | $ | (5 | ) | $ | — | $ | (70 | ) | $ | 406 | $ | (82 | ) | $ | 2,762 | $ | 13 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of January 1, 2012 |
Total realized
and unrealized gains (losses) |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 13 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9 | $ | (13 | ) | $ | 9 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
10 | — | — | — | — | — | (2 | ) | — | — | 8 | — | ||||||||||||||||||||||||||||||||
U.S. corporate (1) |
2,511 | 8 | 63 | 88 | (22 | ) | — | (129 | ) | 725 | (495 | ) | 2,749 | 10 | ||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
1,284 | 2 | 28 | 189 | (12 | ) | — | (127 | ) | 692 | (147 | ) | 1,909 | 1 | ||||||||||||||||||||||||||||||
Residential mortgage- backe |
95 | (1 | ) | 10 | 15 | (12 | ) | — | (23 | ) | 43 | (3 | ) | 124 | (1 | ) | ||||||||||||||||||||||||||||
Commercial mortgage- backed |
39 | — | 2 | — | — | — | (1 | ) | — | (7 | ) | 33 | — | |||||||||||||||||||||||||||||||
Other asset-backed |
271 | 1 | 17 | 276 | (22 | ) | — | (60 | ) | 224 | (26 | ) | 681 | 1 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total fixed maturity securities |
4,223 | 10 | 120 | 568 | (68 | ) | — | (342 | ) | 1,693 | (691 | ) | 5,513 | 11 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Equity securities |
98 | 1 | (2 | ) | 9 | (7 | ) | — | — | — | — | 99 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
264 | 11 | — | 34 | (70 | ) | — | (18 | ) | 4 | (31 | ) | 194 | 12 | ||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
5 | — | — | — | — | — | (2 | ) | — | — | 3 | — | ||||||||||||||||||||||||||||||||
Credit default swaps |
— | 8 | — | — | — | — | (3 | ) | — | — | 5 | 8 | ||||||||||||||||||||||||||||||||
Equity index options |
39 | (46 | ) | — | 31 | — | — | — | — | — | 24 | (42 | ) | |||||||||||||||||||||||||||||||
Other foreign currency contracts |
9 | (11 | ) | — | 3 | — | — | (1 | ) | — | — | — | (11 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total derivative assets |
53 | (49 | ) | — | 34 | — | — | (6 | ) | — | — | 32 | (45 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total other invested assets |
317 | (38 | ) | — | 68 | (70 | ) | — | (24 | ) | 4 | (31 | ) | 226 | (33 | ) | ||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
176 | 18 | — | 100 | (100 | ) | — | — | — | — | 194 | 13 | ||||||||||||||||||||||||||||||||
Other assets: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent receivable |
— | (7 | ) | — | — | — | 16 | — | — | — | 9 | (7 | ) | |||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
16 | (7 | ) | — | — | — | 2 | — | — | — | 11 | (7 | ) | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total Level 3 assets |
$ | 4,830 | $ | (23 | ) | $ | 118 | $ | 745 | $ | (245 | ) | $ | 18 | $ | (366 | ) | $ | 1,697 | $ | (722 | ) | $ | 6,052 | $ | (23 | ) | |||||||||||||||||
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|
|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. During the second quarter of 2012, we began classifying private securities without an external rating as Level 3, which resulted in a significant number of securities being transferred into Level 3. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(Amounts in millions) |
Beginning balance as of January 1, 2011 |
Total realized
and unrealized gains (losses) |
Sales | Issuances | Settlements |
Transfer into |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total gains (losses)
included
in (loss) attributable to assets |
|||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Purchases | Level 3 | still held | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 11 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 12 | $ | (22 | ) | $ | 1 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||
U.S. corporate (1) |
1,100 | (13 | ) | 45 | 71 | (5 | ) | — | (70 | ) | 634 | (412 | ) | 1,350 | (13 | ) | ||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
368 | (26 | ) | 27 | 40 | (35 | ) | — | (8 | ) | 225 | (221 | ) | 370 | (26 | ) | ||||||||||||||||||||||||||||
Residential mortgage-backed |
143 | — | (15 | ) | 3 | — | — | (24 | ) | 3 | (3 | ) | 107 | — | ||||||||||||||||||||||||||||||
Commercial mortgage-backed |
50 | — | 1 | — | — | — | (11 | ) | 1 | — | 41 | — | ||||||||||||||||||||||||||||||||
Other asset-backed |
268 | (1 | ) | 5 | 8 | (8 | ) | — | (32 | ) | 15 | — | 255 | (1 | ) | |||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total fixed maturity securities |
1,941 | (40 | ) | 63 | 122 | (48 | ) | — | (145 | ) | 890 | (658 | ) | 2,125 | (40 | ) | ||||||||||||||||||||||||||||
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Equity securities |
87 | 1 | — | 24 | (10 | ) | — | (2 | ) | — | — | 100 | — | |||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
329 | 4 | — | 5 | (41 | ) | — | (23 | ) | — | — | 274 | 4 | |||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
5 | 2 | — | — | — | — | (1 | ) | — | — | 6 | 2 | ||||||||||||||||||||||||||||||||
Credit default swaps |
6 | (6 | ) | — | — | — | — | — | — | — | — | (6 | ) | |||||||||||||||||||||||||||||||
Equity index options |
33 | 31 | — | 39 | — | — | (41 | ) | — | — | 62 | 10 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total derivative assets |
44 | 27 | — | 39 | — | — | (42 | ) | — | — | 68 | 6 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total other invested assets |
373 | 31 | — | 44 | (41 | ) | — | (65 | ) | — | — | 342 | 10 | |||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
171 | 3 | — | — | — | — | — | — | — | 174 | 3 | |||||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
(5 | ) | 24 | — | — | — | 2 | — | — | — | 21 | 24 | ||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total Level 3 assets |
$ | 2,567 | $ | 19 | $ | 63 | $ | 190 | $ | (99 | ) | $ | 2 | $ | (212 | ) | $ | 890 | $ | (658 | ) | $ | 2,762 | $ | (3 | ) | ||||||||||||||||||
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|
|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
The following tables present the gains and losses included in net income (loss) from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months
ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Total realized and unrealized gains (losses) included in net income (loss): |
||||||||||||||||
Net investment income |
$ | 8 | $ | 7 | $ | 22 | $ | 18 | ||||||||
Net investment gains (losses) |
(18 | ) | 28 | (45 | ) | 1 | ||||||||||
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|
|||||||||
Total |
$ | (10 | ) | $ | 35 | $ | (23 | ) | $ | 19 | ||||||
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|
|
|
|
|||||||||
Total gains (losses) included in net income (loss) attributable to assets still held: |
||||||||||||||||
Net investment income |
$ | 4 | $ | 7 | $ | 17 | $ | 19 | ||||||||
Net investment gains (losses) |
(19 | ) | 6 | (40 | ) | (22 | ) | |||||||||
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|
|||||||||
Total |
$ | (15 | ) | $ | 13 | $ | (23 | ) | $ | (3 | ) | |||||
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|
|
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|
|
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of July 1, 2012 |
Total realized
and unrealized (gains) losses |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||||||||||||||||
Included in net (income) loss |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 453 | $ | (83 | ) | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 380 | $ | (81 | ) | ||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
10 | 1 | — | — | — | 10 | — | — | — | 21 | 1 | |||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total policyholder account balances |
463 | (82 | ) | — | — | — | 20 | — | — | — | 401 | (80 | ) | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Other liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent purchase price |
31 | — | — | — | — | — | — | — | — | 31 | — | |||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
37 | (19 | ) | — | — | — | — | (9 | ) | — | — | 9 | (19 | ) | ||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
155 | (20 | ) | — | 1 | — | — | — | — | — | 136 | (20 | ) | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total derivative liabilities |
192 | (39 | ) | — | 1 | — | — | (9 | ) | — | — | 145 | (39 | ) | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total other liabilities |
223 | (39 | ) | — | 1 | — | — | (9 | ) | — | — | 176 | (39 | ) | ||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Borrowings related to securitization entities |
57 | 3 | — | — | — | — | — | — | — | 60 | 3 | |||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total Level 3 liabilities |
$ | 743 | $ | (118 | ) | $ | — | $ | 1 | $ | — | $ | 20 | $ | (9 | ) | $ | — | $ | — | $ | 637 | $ | (116 | ) | |||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
(Amounts in millions) |
Beginning balance as of July 1, 2011 |
Total realized
and unrealized (gains) losses |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total
(gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||||||||||||||||
Included in net (income) loss |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 113 | $ | 480 | $ | — | $ | — | $ | — | $ | 9 | $ | — | $ | — | $ | — | $ | 602 | $ | 480 | ||||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
5 | (1 | ) | — | — | — | — | — | — | — | 4 | (1 | ) | |||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||||||||||||||
Total policyholder account balances |
118 | 479 | — | — | — | 9 | — | — | — | 606 | 479 | |||||||||||||||||||||||||||||||||
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|
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|
|||||||||||||||||||||||
Other liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent purchase price |
— | 22 | — | — | — | 22 | — | — | — | 44 | 22 | |||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
9 | 66 | — | — | — | — | — | — | — | 75 | 66 | |||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
126 | 54 | — | — | — | — | — | — | — | 180 | 54 | |||||||||||||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||||||
Total derivative liabilities |
135 | 120 | — | — | — | — | — | — | — | 255 | 120 | |||||||||||||||||||||||||||||||||
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|
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|
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|
|||||||||||||||||||||||
Total other liabilities |
135 | 142 | — | — | — | 22 | — | — | — | 299 | 142 | |||||||||||||||||||||||||||||||||
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|
|
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|
|
|||||||||||||||||||||||
Borrowings related to securitization entities |
58 | (10 | ) | — | — | — | — | — | — | — | 48 | (10 | ) | |||||||||||||||||||||||||||||||
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|
|
|||||||||||||||||||||||
Total Level 3 liabilities |
$ | 311 | $ | 611 | $ | — | $ | — | $ | — | $ | 31 | $ | — | $ | — | $ | — | $ | 953 | $ | 611 | ||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of January 1, 2012 |
Total
realized and unrealized (gains) losses |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||||||||||||||||
Included in net (income) loss |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 492 | $ | (139 | ) | $ | — | $ | — | $ | — | $ | 27 | $ | — | $ | — | $ | — | $ | 380 | $ | (134 | ) | ||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
4 | 2 | — | — | — | 15 | — | — | — | 21 | 2 | |||||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total policyholder account balances |
496 | (137 | ) | — | — | — | 42 | — | — | — | 401 | (132 | ) | |||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|||||||||||||||||||||||
Other liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent purchase price |
46 | 3 | — | — | — | — | (18 | ) | — | — | 31 | 3 | ||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
57 | (37 | ) | — | 2 | — | — | (13 | ) | — | — | 9 | (40 | ) | ||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
177 | (43 | ) | — | 2 | — | — | — | — | — | 136 | (43 | ) | |||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|||||||||||||||||||||||
Total derivative liabilities |
234 | (80 | ) | — | 4 | — | — | (13 | ) | — | — | 145 | (83 | ) | ||||||||||||||||||||||||||||||
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total other liabilities |
280 | (77 | ) | — | 4 | — | — | (31 | ) | — | — | 176 | (80 | ) | ||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Borrowings related to securitization entities |
48 | 12 | — | — | — | — | — | — | — | 60 | 12 | |||||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total Level 3 liabilities |
$ | 824 | $ | (202 | ) | $ | — | $ | 4 | $ | — | $ | 42 | $ | (31 | ) | $ | — | $ | — | $ | 637 | $ | (200 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
Beginning balance as of January 1, 2011 |
Total
realized and |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total (gains) losses included in net (income) attributable to liabilities still held |
|||||||||||||||||||||||||||||||||||
(Amounts in millions) |
Included in net (income) |
Included in OCI |
||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 121 | $ | 452 | $ | — | $ | — | $ | — | $ | 29 | $ | — | $ | — | $ | — | $ | 602 | $ | 452 | ||||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
5 | (1 | ) | — | — | — | — | — | — | — | 4 | (1 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total policyholder account balances |
126 | 451 | — | — | — | 29 | — | — | — | 606 | 451 | |||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||||||||||
Other liabilities: |
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Contingent purchase price |
— | 23 | — | — | — | 21 | — | — | — | 44 | 23 | |||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
7 | 66 | — | 3 | — | — | (1 | ) | — | — | 75 | 66 | ||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
129 | 51 | — | — | — | — | — | — | — | 180 | 51 | |||||||||||||||||||||||||||||||||
Equity index options |
3 | — | — | — | — | — | (3 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||
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Total derivative liabilities |
139 | 117 | — | 3 | — | — | (4 | ) | — | — | 255 | 117 | ||||||||||||||||||||||||||||||||
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Total other liabilities |
139 | 140 | — | 3 | — | 21 | (4 | ) | — | — | 299 | 140 | ||||||||||||||||||||||||||||||||
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Borrowings related to securitization entities |
51 | (3 | ) | — | — | — | — | — | — | — | 48 | (3 | ) | |||||||||||||||||||||||||||||||
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Total Level 3 liabilities |
$ | 316 | $ | 588 | $ | — | $ | 3 | $ | — | $ | 50 | $ | (4 | ) | $ | — | $ | — | $ | 953 | $ | 588 | |||||||||||||||||||||
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(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The following tables present the gains and losses included in net (income) loss from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Total realized and unrealized (gains) losses included in net (income) loss: |
||||||||||||||||
Net investment income |
$ | — | $ | — | $ | — | $ | — | ||||||||
Net investment (gains) losses |
(118 | ) | 611 | (202 | ) | 588 | ||||||||||
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Total |
$ | (118 | ) | $ | 611 | $ | (202 | ) | $ | 588 | ||||||
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Total (gains) losses included in net (income) loss attributable to liabilities still held: |
||||||||||||||||
Net investment income |
$ | — | $ | — | $ | — | $ | — | ||||||||
Net investment (gains) losses |
(116 | ) | 611 | (200 | ) | 588 | ||||||||||
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Total |
$ | (116 | ) | $ | 611 | $ | (200 | ) | $ | 588 | ||||||
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Realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either net investment gains (losses) within the consolidated statements of income or OCI within stockholders’ equity based on the appropriate accounting treatment for the instrument.
Purchases, sales, issuances and settlements represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases, sales and settlements of fixed maturity, equity and trading securities and purchases, issuances and settlements of derivative instruments.
Issuances and settlements presented for policyholder account balances represent the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income) loss” in the tables presented above.
The amount presented for unrealized gains (losses) included in net income for available-for-sale securities represents impairments and accretion on certain fixed maturity securities.
Certain classes of instruments classified as Level 3 are excluded below as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value. The following table presents a summary of the significant unobservable inputs used for certain fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2012:
(Amounts in millions) |
Valuation technique |
Fair value |
Unobservable input |
Range (weighted-average) |
||||||
Assets |
||||||||||
Fixed maturity securities: |
||||||||||
U.S. corporate |
Matrix pricing | $ | 2,611 | Credit spreads | 63bps - 1,127bps (218bps) | |||||
Corporate—non-U.S. |
Matrix pricing | 1,847 | Credit spreads | 83bps - 376bps (204bps) | ||||||
Derivative assets: |
||||||||||
Interest rate swaps |
Discounted cash flows | 3 | Interest rate volatility | 25% - 35% (30%) | ||||||
Credit default swaps (1) |
Discounted cash flows | 5 | Credit spreads | 15bps - 89bps (49bps) | ||||||
Equity index option |
Discounted cash flows | 24 | Equity index volatility | 15% - 48% (30%) | ||||||
Other assets: |
||||||||||
Contingent receivable |
Discounted cash flows | 9 | Discount rate | 23% | ||||||
Liabilities |
||||||||||
Policyholder account balances: |
||||||||||
Withdrawal utilization rate | —% - 97% | |||||||||
Lapse rate | —% - 25% | |||||||||
Non-performance risk (credit spreads) |
55bps - 90bps (80bps) | |||||||||
GMWB embedded derivatives (2) |
Stochastic cash flow model | 380 | Equity index volatility | 19% - 25% (22%) | ||||||
Fixed index annuity embedded derivatives (3) |
Option budget method | 21 |
Expected future interest credited |
1% - 3% (2%) | ||||||
Other liabilities: |
||||||||||
Contingent purchase price |
Discounted cash flows | 31 | Discount rate | 23% | ||||||
Derivative liabilities: |
||||||||||
Credit default swaps (1) |
Discounted cash flows | 9 | Credit spreads | 158bps - 211bps (197bps) |
(1) |
Unobservable input valuation based on the current market credit default swap premium. |
(2) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(3) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
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(7) Commitments and Contingencies
(a) Litigation
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third-party’s municipal guaranteed investment contract business, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement Procedures Act of 1974 (“RESPA”) or related state anti-inducement laws, and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.
As previously disclosed, in December 2011, one of our U.S. mortgage insurance subsidiaries received a subpoena from the United States Department of Housing and Urban Development, Office of the Inspector General with respect to reinsurance arrangements, including captive reinsurance transactions. That subpoena was withdrawn subsequent to our subsidiary’s receipt of an information request from the Consumer Financial Protection Bureau (“CFPB”) in January 2012, relating to the same subject matter. The CFPB further sent to our subsidiary a Civil Investigative Demand dated June 20, 2012 (the “CFPB Demand”) seeking production of specified documents and responses to questions set forth in the CFPB Demand. We intend to cooperate with the CFPB as appropriate in connection with the CFPB Demand.
As previously disclosed, beginning in December 2011, one of our U.S. mortgage insurance subsidiaries was named along with several other mortgage insurance participants and mortgage lenders as a defendant in three putative class action lawsuits alleging that certain “captive reinsurance arrangements” were in violation of RESPA. Eight additional putative class actions, making similar allegations, have since been filed in which our mortgage insurance subsidiary is again named as one of numerous defendants. Those cases are captioned as follows: McCarn, et al. v. HSB, et al., United States District Court for the Eastern District of California; Manners, et al, v. First Third Bank, et al., United States District court for the Western District of Pennsylvania; Riddle, et al. v Bank of America, et al., United States District Court for the Eastern District of Pennsylvania; Rulison et al. v. ABN AMRO Mortgage Group, Inc. et al., United States District Court for the Southern District of New York; Barlee, et al. v. First Horizon National Corp., et al., United States District Court for the Eastern District of Pennsylvania; Cunningham, et al. v. M&T Bank Corp., et al., United States District Court for the Middle District of Pennsylvania; Orange, et al. v. Wachovia Bank, N.A., et al., United States District Court for the Central District of California; and Hill et al. v. Flagstar Bank, FSB, et al., United States District Court for the Eastern District of Pennsylvania. The Rulison case was voluntarily dismissed by the plaintiffs. We intend to vigorously defend these remaining actions.
As previously disclosed, in April 2012, two of our U.S. mortgage insurance subsidiaries were named as respondents in two arbitrations, one brought by Bank of America, N.A., and one brought by Countrywide Home Loans, Inc. and Bank of America, N.A., as claimants. Claimants allege breach of contract and breach of the covenant of good faith and fair dealing, and seek a declaratory judgment relating to our subsidiaries’ mortgage insurance claims handling practices in connection with denying, curtailing or rescinding coverage of mortgage insurance. Claimants seek damages in excess of $834 million, in addition to interest and punitive damages. In June 2012, our U.S. mortgage insurance subsidiaries responded to the arbitration demands and asserted numerous counterclaims against the claimants. We intend to vigorously defend these actions and pursue the counterclaims.
At this time, we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above. In light of the inherent uncertainties involved in these matters, no amounts have been accrued. We also are not able to provide an estimate or range of possible losses related to these matters.
(b) Commitments
As of September 30, 2012, we were committed to fund $57 million in limited partnership investments and $98 million in U.S. commercial mortgage loan investments.
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(8) Borrowings and Other Financings
Revolving Credit Facilities
We had two five-year revolving credit facilities of $930 million each, one that matured in May 2012 and the other in August 2012. We did not renew either of these facilities. These facilities had variable interest rates based on one-month London Interbank Offered Rate plus a margin. At the time of maturity, we had no borrowings under either of these facilities and no letters of credit outstanding. Any letters of credit that were previously outstanding under these facilities have been replaced via other arrangements. As of December 31, 2011, we had no borrowings under either of these facilities; however, we utilized $257 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries.
Long-Term Notes
We repaid $222 million of senior notes with an interest rate equal to 5.65% per year payable semi-annually that matured in June 2012.
In March 2012, we priced a $350 million reopening of our 7.625% senior notes due in September 2021. The notes were offered as additional debt securities under an indenture, as supplemented from time to time, pursuant to which we have previously issued $400 million aggregate principal amount of our 7.625% senior notes due in September 2021. The notes are our direct, unsecured obligations and rank equally with all of our existing and future unsecured and unsubordinated obligations. The notes were issued at a public offering price of 103% of principal amount, with a yield to maturity of 7.184%. The net proceeds of $358 million from the issuance of the new notes were used for general corporate purposes, including increasing liquidity at the holding company level.
Non-Recourse Funding Obligations
As of September 30, 2012, we had $2.3 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves.
During the three months ended September 30, 2012, as part of a life block transaction, we repurchased $270 million of non-recourse funding obligations issued by River Lake Insurance Company IV, our indirect wholly-owned subsidiary, resulting in a U.S. GAAP after-tax gain of approximately $21 million. We also recorded higher after-tax amortization of deferred acquisition costs of $25 million reflecting loss recognition associated with a third-party reinsurance treaty plus additional expenses. The combined transactions resulted in a U.S. GAAP after-tax loss of $6 million in the three months ended September 30, 2012 which was included in our U.S. Life Insurance segment.
In January 2012, as part of a life block transaction, we repurchased $475 million of our non-recourse funding obligations issued by River Lake Insurance Company III (“River Lake III”), our indirect wholly-owned subsidiary, resulting in a U.S. GAAP after-tax gain of approximately $52 million. In connection with the repurchase, we ceded certain term life insurance policies to a third-party reinsurer resulting in a U.S. GAAP after-tax loss, net of amortization of deferred acquisition costs, of $93 million. The combined transactions resulted in a U.S. GAAP after-tax loss of approximately $41 million in the three months ended March 31, 2012 which was included in our U.S. Life Insurance segment. In February and March 2012, we repaid the remaining non-recourse funding obligations issued by River Lake III of $176 million.
As of September 30, 2012 and December 31, 2011, the weighted-average interest rates on our non-recourse funding obligations were 1.29% and 1.41%, respectively.
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(9) Income Taxes
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||||||||
Pre-tax income |
$ | 99 | $ | 13 | $ | 367 | $ | 21 | ||||||||||||||||||||||||
Statutory U.S. federal income tax rate |
$ | 35 | 35.0 | % | $ | 5 | 35.0 | % | $ | 128 | 35.0 | % | $ | 7 | 35.0 | % | ||||||||||||||||
Increase (reduction) in rate resulting from: |
||||||||||||||||||||||||||||||||
State income tax, net of federal income tax effect |
(1 | ) | (1.1 | ) | (1 | ) | (9.0 | ) | — | 0.1 | 2 | 9.9 | ||||||||||||||||||||
Benefit on tax favored investments |
(3 | ) | (3.5 | ) | (12 | ) | (93.9 | ) | (5 | ) | (1.5 | ) | (13 | ) | (60.5 | ) | ||||||||||||||||
Effect of foreign operations |
(21 | ) | (21.6 | ) | 6 | 44.5 | (40 | ) | (10.9 | ) | 14 | 66.8 | ||||||||||||||||||||
Sale of subsidiary |
— | — | — | — | 8 | 2.3 | — | — | ||||||||||||||||||||||||
Non-deductible expenses |
— | 0.8 | 1 | 4.8 | 2 | 0.4 | 1 | 3.2 | ||||||||||||||||||||||||
Interest on uncertain tax positions |
(2 | ) | (1.9 | ) | (1 | ) | (4.8 | ) | (4 | ) | (1.2 | ) | — | (1.6 | ) | |||||||||||||||||
Non-deductible goodwill |
19 | 19.1 | — | — | 19 | 5.1 | — | — | ||||||||||||||||||||||||
Other, net |
2 | 2.5 | (5 | ) | (30.4 | ) | — | 0.1 | (3 | ) | (14.7 | ) | ||||||||||||||||||||
Effective rate |
$ | 29 | 29.3 | % | $ | (7 | ) | (53.8 | )% | $ | 108 | 29.4 | % | $ | 8 | 38.1 | % | |||||||||||||||
For the three months ended September 30, 2012, the increase in the effective tax rate compared to the prior year was primarily attributable to lower taxed foreign income, a goodwill impairment and tax favored investments.
For the nine months ended September 30, 2012, the decrease in the effective tax rate compared to the prior year was primarily attributable to lower taxed foreign income, partially offset by tax favored investments, a goodwill impairment and the sale of our tax and accounting financial advisor unit, Genworth Financial Investment Services (“GFIS”).
Due to events that occurred during the nine months ended September 30, 2012, we recognized or settled approximately $183 million of previously unrecognized tax benefits. This had no impact on the effective tax rate. As of September 30, 2012, we had approximately $50 million of remaining unrecognized tax benefits.
|
(10) Segment Information
We currently conduct our operations in the following operating business segments: (1) U.S. Life Insurance, which includes our life insurance, long-term care insurance and fixed annuities businesses; (2) International Protection Insurance, which includes our lifestyle protection insurance business; (3) Wealth Management; (4) International Mortgage Insurance, which includes mortgage insurance-related products and services; (5) U.S. Mortgage Insurance, which includes mortgage insurance-related products and services; and (6) Runoff, which includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and Medicare supplement insurance products. Institutional products consist of funding agreements, FABNs and GICs.
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other non-core businesses that are managed outside of our operating segments.
We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define net operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding the after-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses and infrequent or unusual non-operating items. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments and gains (losses) on the sale of businesses are also excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Other non-operating items are also excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends.
In the third quarter of 2012, we revised our definition of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders to exclude goodwill impairments to better reflect the basis on which the performance of our business is internally assessed and to reflect management’s opinion that it is not indicative of overall operating trends. There was an $86 million after-tax goodwill impairment related to our lifestyle protection insurance business recorded in the third quarter of 2012. We also modified our definition to explicitly state that gains (losses) on the sale of businesses, which were previously included in the infrequent and unusual category, are excluded from net operating income (loss). There was a $15 million gain related to the sale of our tax and accounting financial advisor unit in the second quarter of 2012.
There were no infrequent or unusual items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented.
While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses net operating income (loss) available to Genworth Financial, Inc.’s common stockholders as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Net operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenues: |
||||||||||||||||
U.S. Life Insurance segment: |
||||||||||||||||
Life insurance |
$ | 533 | $ | 532 | $ | 1,404 | $ | 1,545 | ||||||||
Long-term care insurance |
809 | 785 | 2,381 | 2,227 | ||||||||||||
Fixed annuities |
284 | 243 | 838 | 792 | ||||||||||||
U.S. Life Insurance segment’s revenues |
1,626 | 1,560 | 4,623 | 4,564 | ||||||||||||
International Protection segment’s revenues |
198 | 245 | 627 | 796 | ||||||||||||
Wealth Management segment’s revenues |
82 | 115 | 316 | 339 | ||||||||||||
International Mortgage Insurance segment: |
||||||||||||||||
Canada |
197 | 207 | 591 | 623 | ||||||||||||
Australia |
140 | 184 | 421 | 467 | ||||||||||||
Other Countries |
13 | 17 | 45 | 57 | ||||||||||||
International Mortgage Insurance segment’s revenues |
350 | 408 | 1,057 | 1,147 | ||||||||||||
U.S. Mortgage Insurance segment’s revenues |
154 | 171 | 513 | 518 | ||||||||||||
Runoff segment’s revenues |
92 | 18 | 289 | 363 | ||||||||||||
Corporate and Other’s revenues |
34 | 4 | 60 | 17 | ||||||||||||
Total revenues |
$ | 2,536 | $ | 2,521 | $ | 7,485 | $ | 7,744 | ||||||||
The following is a summary of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities to net income (loss) for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
U.S. Life Insurance segment: |
||||||||||||||||
Life insurance |
$ | 22 | $ | 64 | $ | 58 | $ | 163 | ||||||||
Long-term care insurance |
45 | 17 | 94 | 71 | ||||||||||||
Fixed annuities |
19 | 21 | 62 | 60 | ||||||||||||
U.S. Life Insurance segment’s net operating income |
86 | 102 | 214 | 294 | ||||||||||||
International Protection segment’s net operating income |
8 | 22 | 16 | 72 | ||||||||||||
Wealth Management segment’s net operating income |
10 | 12 | 34 | 35 | ||||||||||||
International Mortgage Insurance segment: |
||||||||||||||||
Canada |
42 | 40 | 120 | 119 | ||||||||||||
Australia |
57 | 36 | 80 | 142 | ||||||||||||
Other Countries |
(5 | ) | (8 | ) | (23 | ) | (16 | ) | ||||||||
International Mortgage Insurance segment’s net operating income |
94 | 68 | 177 | 245 | ||||||||||||
U.S. Mortgage Insurance segment’s net operating loss |
(38 | ) | (79 | ) | (106 | ) | (417 | ) | ||||||||
Runoff segment’s net operating income (loss) |
9 | (7 | ) | 38 | 12 | |||||||||||
Corporate and Other’s net operating loss |
(48 | ) | (56 | ) | (141 | ) | (217 | ) | ||||||||
Net operating income |
121 | 62 | 232 | 24 | ||||||||||||
Net investment gains (losses), net of taxes and other adjustments |
(1 | ) | (78 | ) | (4 | ) | (117 | ) | ||||||||
Goodwill impairment, net of taxes |
(86 | ) | — | (86 | ) | — | ||||||||||
Gain on sale of business, net of taxes |
— | — | 15 | — | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders |
34 | (16 | ) | 157 | (93 | ) | ||||||||||
Add: net income attributable to noncontrolling interests |
36 | 36 | 102 | 106 | ||||||||||||
Net income |
$ | 70 | $ | 20 | $ | 259 | $ | 13 | ||||||||
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
(Amounts in millions) |
September 30, 2012 |
December 31, 2011 |
||||||
Assets: |
||||||||
U.S. Life Insurance |
$ | 79,499 | $ | 75,547 | ||||
International Protection |
2,220 | 2,375 | ||||||
Wealth Management |
460 | 523 | ||||||
International Mortgage Insurance |
10,233 | 9,643 | ||||||
U.S. Mortgage Insurance |
2,491 | 2,966 | ||||||
Runoff |
15,670 | 16,031 | ||||||
Corporate and Other |
3,814 | 5,102 | ||||||
Total assets |
$ | 114,387 | $ | 112,187 | ||||
|
(11) Sale of Tax and Accounting Financial Advisor Unit
On April 2, 2012, we completed the sale of our tax and accounting financial advisor unit, GFIS, for approximately $79 million, plus contingent consideration, to Cetera Financial Group. The contingent consideration was recorded at fair value upon disposition and provides the opportunity for us to receive additional future payments of up to approximately $25 million based on achieving certain revenue goals. We recognized a realized gain of $15 million in other income related to the sale. GFIS was included in our Wealth Management segment.
|
(12) Goodwill
During the third quarter of 2012, we completed our annual goodwill impairment analysis based on data as of July 1, 2012. As a result of this analysis, we recorded a goodwill impairment related to our international protection reporting unit. For all other of our reporting units, there were no charges to income as a result of our annual goodwill impairment testing. We determined fair value for our international protection reporting unit using an income approach based on discounted cash flows, considering current market conditions, including the market environment in Europe and lower trading multiples of European financial services companies, and the impact of those conditions on our international protection reporting unit in a market transaction that may require a higher risk premium. As a result of our analysis, we determined the fair value of the reporting unit was below book value and determined the goodwill associated with this reporting unit was not recoverable. Therefore, we recorded a goodwill impairment of $89 million for the write-off of all of the goodwill associated with our international protection reporting unit during the third quarter of 2012.
|
The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Assets |
||||||||||||||||
Total investments |
$ | 71,904 | $ | — | $ | — | $ | 71,904 | ||||||||
Cash and cash equivalents |
4,488 | — | — | 4,488 | ||||||||||||
Accrued investment income |
691 | — | — | 691 | ||||||||||||
Deferred acquisition costs |
7,327 | (2,134 | ) | — | 5,193 | |||||||||||
Intangible assets |
577 | 3 | — | 580 | ||||||||||||
Goodwill |
1,253 | — | — | 1,253 | ||||||||||||
Reinsurance recoverable |
16,982 | — | 16 | 16,998 | ||||||||||||
Other assets |
958 | — | — | 958 | ||||||||||||
Separate account assets |
10,122 | — | — | 10,122 | ||||||||||||
Total assets |
$ | 114,302 | $ | (2,131 | ) | $ | 16 | $ | 112,187 | |||||||
Liabilities and stockholders’ equity |
||||||||||||||||
Liabilities: |
||||||||||||||||
Future policy benefits |
$ | 31,971 | $ | 3 | $ | 201 | $ | 32,175 | ||||||||
Policyholder account balances |
26,345 | — | — | 26,345 | ||||||||||||
Liability for policy and contract claims |
7,620 | — | — | 7,620 | ||||||||||||
Unearned premiums |
4,257 | (34 | ) | — | 4,223 | |||||||||||
Other liabilities |
6,308 | — | — | 6,308 | ||||||||||||
Borrowings related to securitization entities |
396 | — | — | 396 | ||||||||||||
Non-recourse funding obligations |
3,256 | — | — | 3,256 | ||||||||||||
Long-term borrowings |
4,726 | — | — | 4,726 | ||||||||||||
Deferred tax liability |
1,636 | (733 | ) | (65 | ) | 838 | ||||||||||
Separate account liabilities |
10,122 | — | — | 10,122 | ||||||||||||
Total liabilities |
96,637 | (764 | ) | 136 | 96,009 | |||||||||||
Stockholders’ equity: |
||||||||||||||||
Class A common stock |
1 | — | — | 1 | ||||||||||||
Additional paid-in capital |
12,124 | 12 | — | 12,136 | ||||||||||||
Accumulated other comprehensive income (loss): |
||||||||||||||||
Net unrealized investment gains (losses): |
||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
1,586 | 31 | — | 1,617 | ||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
(132 | ) | — | — | (132 | ) | ||||||||||
Net unrealized investment gains (losses) |
1,454 | 31 | — | 1,485 | ||||||||||||
Derivatives qualifying as hedges |
2,009 | — | — | 2,009 | ||||||||||||
Foreign currency translation and other adjustments |
558 | (5 | ) | — | 553 | |||||||||||
Total accumulated other comprehensive income (loss) |
4,021 | 26 | — | 4,047 | ||||||||||||
Retained earnings |
3,095 | (1,391 | ) | (120 | ) | 1,584 | ||||||||||
Treasury stock, at cost |
(2,700 | ) | — | — | (2,700 | ) | ||||||||||
Total Genworth Financial, Inc.’s stockholders’ equity |
16,541 | (1,353 | ) | (120 | ) | 15,068 | ||||||||||
Noncontrolling interests |
1,124 | (14 | ) | — | 1,110 | |||||||||||
Total stockholders’ equity |
17,665 | (1,367 | ) | (120 | ) | 16,178 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 114,302 | $ | (2,131 | ) | $ | 16 | $ | 112,187 | |||||||
The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 1,461 | $ | — | $ | — | $ | 1,461 | ||||||||
Net investment income |
842 | — | — | 842 | ||||||||||||
Net investment gains (losses) |
(157 | ) | — | — | (157 | ) | ||||||||||
Insurance and investment product fees and other |
375 | — | — | 375 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
2,521 | — | — | 2,521 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
||||||||||||||||
Benefits and other changes in policy reserves |
1,457 | — | — | 1,457 | ||||||||||||
Interest credited |
194 | — | — | 194 | ||||||||||||
Acquisition and operating expenses, net of deferrals |
510 | 71 | — | 581 | ||||||||||||
Amortization of deferred acquisition costs and intangibles |
190 | (38 | ) | — | 152 | |||||||||||
Interest expense |
124 | — | — | 124 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total benefits and expenses |
2,475 | 33 | — | 2,508 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
46 | (33 | ) | — | 13 | |||||||||||
Benefit for income taxes |
(19 | ) | 12 | — | (7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
65 | (45 | ) | — | 20 | |||||||||||
Less: net income attributable to noncontrolling interests |
36 | — | — | 36 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders |
$ | 29 | $ | (45 | ) | $ | — | $ | (16 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||||||
Basic(1) |
$ | 0.06 | $ | (0.09 | ) | $ | — | $ | (0.03 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted (1) |
$ | 0.06 | $ | (0.09 | ) | $ | — | $ | (0.03 | ) | ||||||
|
|
|
|
|
|
|
|
(1) | May not total due to whole number calculation. |
The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 4,353 | $ | — | $ | — | $ | 4,353 | ||||||||
Net investment income |
2,553 | — | — | 2,553 | ||||||||||||
Net investment gains (losses) |
(225 | ) | — | — | (225 | ) | ||||||||||
Insurance and investment product fees and other |
1,063 | — | — | 1,063 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
7,744 | — | — | 7,744 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefits and expenses: |
||||||||||||||||
Benefits and other changes in policy reserves |
4,538 | — | 11 | 4,549 | ||||||||||||
Interest credited |
599 | — | — | 599 | ||||||||||||
Acquisition and operating expenses, net of deferrals |
1,524 | 201 | — | 1,725 | ||||||||||||
Amortization of deferred acquisition costs and intangibles |
572 | (107 | ) | — | 465 | |||||||||||
Interest expense |
385 | — | — | 385 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total benefits and expenses |
7,618 | 94 | 11 | 7,723 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
126 | (94 | ) | (11 | ) | 21 | ||||||||||
Provision for income taxes |
5 | 7 | (4 | ) | 8 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
121 | (101 | ) | (7 | ) | 13 | ||||||||||
Less: net income attributable to noncontrolling interests |
106 | — | — | 106 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders |
$ | 15 | $ | (101 | ) | $ | (7 | ) | $ | (93 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||||||
Basic(1) |
$ | 0.03 | $ | (0.21 | ) | $ | (0.01 | ) | $ | (0.19 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Diluted (1) |
$ | 0.03 | $ | (0.21 | ) | $ | (0.01 | ) | $ | (0.19 | ) | |||||
|
|
|
|
|
|
|
|
(1) | May not total due to whole number calculation. |
The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:
(Amounts in millions) |
As Originally Reported |
Effect of DAC Change |
Effect of Reserve Change |
As Currently Reported |
||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income |
$ | 121 | $ | (101 | ) | $ | (7 | ) | $ | 13 | ||||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||||||
Amortization of fixed maturity discounts and premiums and limited partnerships |
(71 | ) | — | — | (71 | ) | ||||||||||
Net investment losses |
225 | — | — | 225 | ||||||||||||
Charges assessed to policyholders |
(507 | ) | — | — | (507 | ) | ||||||||||
Acquisition costs deferred |
(686 | ) | 201 | — | (485 | ) | ||||||||||
Amortization of deferred acquisition costs and intangibles |
572 | (107 | ) | — | 465 | |||||||||||
Deferred income taxes |
(158 | ) | 7 | (4 | ) | (155 | ) | |||||||||
Net increase in trading securities, held-for-sale investments and derivative instruments |
795 | — | — | 795 | ||||||||||||
Stock-based compensation expense |
23 | — | — | 23 | ||||||||||||
Change in certain assets and liabilities: |
||||||||||||||||
Accrued investment income and other assets |
(152 | ) | — | — | (152 | ) | ||||||||||
Insurance reserves |
1,942 | — | 11 | 1,953 | ||||||||||||
Current tax liabilities |
8 | — | — | 8 | ||||||||||||
Other liabilities and policy-related balances |
(80 | ) | — | — | (80 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash from operating activities |
$ | 2,032 | $ | — | $ | — | $ | 2,032 | ||||||||
|
|
|
|
|
|
|
|
The following table presents the balance sheet as of September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Assets |
||||||||||||
Total investments |
$ | 74,893 | $ | 74,893 | $ | — | ||||||
Cash and cash equivalents |
3,741 | 3,741 | — | |||||||||
Accrued investment income |
746 | 746 | — | |||||||||
Deferred acquisition costs |
5,020 | 5,020 | — | |||||||||
Intangible assets |
488 | 488 | — | |||||||||
Goodwill |
1,128 | 1,128 | — | |||||||||
Reinsurance recoverable |
17,195 | 17,172 | 23 | |||||||||
Other assets |
1,010 | 1,010 | — | |||||||||
Separate account assets |
10,166 | 10,166 | — | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 114,387 | $ | 114,364 | $ | 23 | ||||||
|
|
|
|
|
|
|||||||
Liabilities and stockholders’ equity |
||||||||||||
Liabilities: |
||||||||||||
Future policy benefits |
$ | 33,221 | $ | 32,997 | $ | 224 | ||||||
Policyholder account balances |
26,449 | 26,449 | — | |||||||||
Liability for policy and contract claims |
7,545 | 7,545 | — | |||||||||
Unearned premiums |
4,291 | 4,291 | — | |||||||||
Other liabilities |
6,073 | 6,073 | — | |||||||||
Borrowings related to securitization entities |
353 | 353 | — | |||||||||
Non-recourse funding obligations |
2,325 | 2,325 | — | |||||||||
Long-term borrowings |
4,880 | 4,880 | — | |||||||||
Deferred tax liability |
1,437 | 1,508 | (71 | ) | ||||||||
Separate account liabilities |
10,166 | 10,166 | — | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
96,740 | 96,587 | 153 | |||||||||
|
|
|
|
|
|
|||||||
Stockholders’ equity: |
||||||||||||
Class A common stock |
1 | 1 | — | |||||||||
Additional paid-in capital |
12,162 | 12,162 | — | |||||||||
Accumulated other comprehensive income (loss): |
||||||||||||
Net unrealized investment gains (losses): |
||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
2,641 | 2,641 | — | |||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
(88 | ) | (88 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Net unrealized investment gains (losses) |
2,553 | 2,553 | — | |||||||||
|
|
|
|
|
|
|||||||
Derivatives qualifying as hedges |
2,011 | 2,011 | — | |||||||||
Foreign currency translation and other adjustments |
659 | 659 | — | |||||||||
|
|
|
|
|
|
|||||||
Total accumulated other comprehensive income (loss) |
5,223 | 5,223 | — | |||||||||
Retained earnings |
1,741 | 1,871 | (130 | ) | ||||||||
Treasury stock, at cost |
(2,700 | ) | (2,700 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total Genworth Financial, Inc.’s stockholders’ equity |
16,427 | 16,557 | (130 | ) | ||||||||
Noncontrolling interests |
1,220 | 1,220 | — | |||||||||
|
|
|
|
|
|
|||||||
Total stockholders’ equity |
17,647 | 17,777 | (130 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total liabilities and stockholders’ equity |
$ | 114,387 | $ | 114,364 | $ | 23 | ||||||
|
|
|
|
|
|
The following table presents the income statement for the three months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Revenues: |
||||||||||||
Premiums |
$ | 1,311 | $ | 1,311 | $ | — | ||||||
Net investment income |
825 | 825 | — | |||||||||
Net investment gains (losses) |
9 | 9 | — | |||||||||
Insurance and investment product fees and other |
391 | 391 | — | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
2,536 | 2,536 | — | |||||||||
|
|
|
|
|
|
|||||||
Benefits and expenses: |
||||||||||||
Benefits and other changes in policy reserves |
1,363 | 1,356 | 7 | |||||||||
Interest credited |
193 | 193 | — | |||||||||
Acquisition and operating expenses, net of deferrals |
504 | 504 | — | |||||||||
Amortization of deferred acquisition costs and intangibles |
162 | 162 | — | |||||||||
Goodwill impairment |
89 | 89 | — | |||||||||
Interest expense |
126 | 126 | — | |||||||||
|
|
|
|
|
|
|||||||
Total benefits and expenses |
2,437 | 2,430 | 7 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
99 | 106 | (7 | ) | ||||||||
Provision for income taxes |
29 | 32 | (3 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net income |
70 | 74 | (4 | ) | ||||||||
Less: net income attributable to noncontrolling interests |
36 | 36 | — | |||||||||
|
|
|
|
|
|
|||||||
Net income available to Genworth Financial, Inc.’s common stockholders |
$ | 34 | $ | 38 | $ | (4 | ) | |||||
|
|
|
|
|
|
|||||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||
Basic |
$ | 0.07 | $ | 0.08 | $ | (0.01 | ) | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.07 | $ | 0.08 | $ | (0.01 | ) | |||||
|
|
|
|
|
|
The following table presents the income statement for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Revenues: |
||||||||||||
Premiums |
$ | 3,720 | $ | 3,720 | $ | — | ||||||
Net investment income |
2,503 | 2,503 | — | |||||||||
Net investment gains (losses) |
10 | 10 | — | |||||||||
Insurance and investment product fees and other |
1,252 | 1,252 | — | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
7,485 | 7,485 | — | |||||||||
|
|
|
|
|
|
|||||||
Benefits and expenses: |
||||||||||||
Benefits and other changes in policy reserves |
3,977 | 3,961 | 16 | |||||||||
Interest credited |
582 | 582 | — | |||||||||
Acquisition and operating expenses, net of deferrals |
1,536 | 1,536 | — | |||||||||
Amortization of deferred acquisition costs and intangibles |
582 | 582 | — | |||||||||
Goodwill impairment |
89 | 89 | — | |||||||||
Interest expense |
352 | 352 | — | |||||||||
|
|
|
|
|
|
|||||||
Total benefits and expenses |
7,118 | 7,102 | 16 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
367 | 383 | (16 | ) | ||||||||
Provision for income taxes |
108 | 114 | (6 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net income |
259 | 269 | (10 | ) | ||||||||
Less: net income attributable to noncontrolling interests |
102 | 102 | — | |||||||||
|
|
|
|
|
|
|||||||
Net income available to Genworth Financial, Inc.’s common stockholders |
$ | 157 | $ | 167 | $ | (10 | ) | |||||
|
|
|
|
|
|
|||||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: |
||||||||||||
Basic |
$ | 0.32 | $ | 0.34 | $ | (0.02 | ) | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.32 | $ | 0.34 | $ | (0.02 | ) | |||||
|
|
|
|
|
|
The following table presents the net cash flows from operating activities for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:
(Amounts in millions) |
As Reported Under New Policy |
As Computed Under Previous Policy |
Effect of Change |
|||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 259 | $ | 269 | $ | (10 | ) | |||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||
Amortization of fixed maturity discounts and premiums and limited partnerships |
(59 | ) | (59 | ) | — | |||||||
Net investment gains |
(10 | ) | (10 | ) | — | |||||||
Charges assessed to policyholders |
(590 | ) | (590 | ) | — | |||||||
Acquisition costs deferred |
(456 | ) | (456 | ) | — | |||||||
Amortization of deferred acquisition costs and intangibles |
582 | 582 | — | |||||||||
Goodwill impairment |
89 | 89 | — | |||||||||
Deferred income taxes |
14 | 20 | (6 | ) | ||||||||
Gain on sale of subsidiary |
(15 | ) | (15 | ) | — | |||||||
Net increase in trading securities, held-for-sale investments and derivative instruments |
66 | 66 | — | |||||||||
Stock-based compensation expense |
20 | 20 | — | |||||||||
Change in certain assets and liabilities: |
||||||||||||
Accrued investment income and other assets |
(160 | ) | (160 | ) | — | |||||||
Insurance reserves |
1,672 | 1,656 | 16 | |||||||||
Current tax liabilities |
(190 | ) | (190 | ) | — | |||||||
Other liabilities and policy-related balances |
(795 | ) | (795 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Net cash from operating activities |
$ | 427 | $ | 427 | $ | — | ||||||
|
|
|
|
|
|
|
Sources of net investment income were as follows for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Fixed maturity securities—taxable |
$ | 659 | $ | 669 | $ | 1,988 | $ | 2,032 | ||||||||
Fixed maturity securities—non-taxable |
2 | 8 | 9 | 29 | ||||||||||||
Commercial mortgage loans |
87 | 89 | 256 | 273 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities |
8 | 11 | 24 | 30 | ||||||||||||
Equity securities |
4 | 3 | 14 | 16 | ||||||||||||
Other invested assets |
48 | 42 | 157 | 131 | ||||||||||||
Policy loans |
31 | 30 | 93 | 89 | ||||||||||||
Cash, cash equivalents and short-term investments |
8 | 12 | 28 | 24 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross investment income before expenses and fees |
847 | 864 | 2,569 | 2,624 | ||||||||||||
Expenses and fees |
(22 | ) | (22 | ) | (66 | ) | (71 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income |
$ | 825 | $ | 842 | $ | 2,503 | $ | 2,553 | ||||||||
|
|
|
|
|
|
|
|
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Available-for-sale securities: |
||||||||||||||||
Realized gains |
$ | 28 | $ | 59 | $ | 112 | $ | 113 | ||||||||
Realized losses |
(14 | ) | (23 | ) | (79 | ) | (88 | ) | ||||||||
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Net realized gains (losses) on available-for-sale securities |
14 | 36 | 33 | 25 | ||||||||||||
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|
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Impairments: |
||||||||||||||||
Total other-than-temporary impairments |
(26 | ) | (39 | ) | (84 | ) | (98 | ) | ||||||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) |
(3 | ) | (13 | ) | (1 | ) | (16 | ) | ||||||||
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|
|
|
|
|
|
|||||||||
Net other-than-temporary impairments |
(29 | ) | (52 | ) | (85 | ) | (114 | ) | ||||||||
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|
|
|
|
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Trading securities |
14 | 11 | 21 | 36 | ||||||||||||
Commercial mortgage loans |
2 | 3 | 7 | 4 | ||||||||||||
Net gains (losses) related to securitization entities |
18 | (57 | ) | 48 | (52 | ) | ||||||||||
Derivative instruments (1) |
(2 | ) | (76 | ) | (4 | ) | (101 | ) | ||||||||
Contingent consideration adjustment |
(8 | ) | (22 | ) | (10 | ) | (23 | ) | ||||||||
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|
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Net investment gains (losses) |
$ | 9 | $ | (157 | ) | $ | 10 | $ | (225 | ) | ||||||
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(1) |
See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses). |
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of and for the periods indicated:
As of or for the three months ended September 30, |
As of or for the nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Beginning balance |
$ | 588 | $ | 726 | $ | 646 | $ | 784 | ||||||||
Additions: |
||||||||||||||||
Other-than-temporary impairments not previously recognized |
5 | 27 | 13 | 31 | ||||||||||||
Increases related to other-than-temporary impairments previously recognized |
10 | 24 | 42 | 72 | ||||||||||||
Reductions: |
||||||||||||||||
Securities sold, paid down or disposed |
(66 | ) | (58 | ) | (164 | ) | (168 | ) | ||||||||
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|
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Ending balance |
$ | 537 | $ | 719 | $ | 537 | $ | 719 | ||||||||
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Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
(Amounts in millions) |
September 30, 2012 | December 31, 2011 | ||||||
Net unrealized gains (losses) on investment securities: |
||||||||
Fixed maturity securities |
$ | 5,925 | $ | 3,742 | ||||
Equity securities |
24 | 5 | ||||||
Other invested assets |
(23 | ) | (30 | ) | ||||
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|
|
|
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Subtotal |
5,926 | 3,717 | ||||||
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves |
(1,867 | ) | (1,303 | ) | ||||
Income taxes, net |
(1,412 | ) | (840 | ) | ||||
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|
|
|
|||||
Net unrealized investment gains (losses) |
2,647 | 1,574 | ||||||
Less: net unrealized investment gains (losses) attributable to noncontrolling interests |
94 | 89 | ||||||
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|
|||||
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc. |
$ | 2,553 | $ | 1,485 | ||||
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|
|
The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:
As of or for the three months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Beginning balance |
$ | 2,016 | $ | 264 | ||||
Unrealized gains (losses) arising during the period: |
||||||||
Unrealized gains (losses) on investment securities |
1,040 | 2,365 | ||||||
Adjustment to deferred acquisition costs |
(39 | ) | (41 | ) | ||||
Adjustment to present value of future profits |
11 | (61 | ) | |||||
Adjustment to sales inducements |
(17 | ) | 6 | |||||
Adjustment to benefit reserves |
(171 | ) | (369 | ) | ||||
Provision for income taxes |
(288 | ) | (665 | ) | ||||
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|
|
|
|||||
Change in unrealized gains (losses) on investment securities |
536 | 1,235 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(6) and $(5) |
9 | 11 | ||||||
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|
|
|
|||||
Change in net unrealized investment gains (losses) |
545 | 1,246 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
8 | 29 | ||||||
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|
|
|||||
Ending balance |
$ | 2,553 | $ | 1,481 | ||||
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|
|||||
As of or for
the nine months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Beginning balance |
$ | 1,485 | $ | (80 | ) | |||
Unrealized gains (losses) arising during the period: |
||||||||
Unrealized gains (losses) on investment securities |
2,157 | 2,932 | ||||||
Adjustment to deferred acquisition costs |
(138 | ) | (89 | ) | ||||
Adjustment to present value of future profits |
(11 | ) | (77 | ) | ||||
Adjustment to sales inducements |
(31 | ) | (1 | ) | ||||
Adjustment to benefit reserves |
(384 | ) | (400 | ) | ||||
Provision for income taxes |
(553 | ) | (828 | ) | ||||
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|
|
|
|||||
Change in unrealized gains (losses) on investment securities |
1,040 | 1,537 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(19) and $(31) |
33 | 58 | ||||||
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|
|
|||||
Change in net unrealized investment gains (losses) |
1,073 | 1,595 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
5 | 34 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 2,553 | $ | 1,481 | ||||
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As of September 30, 2012, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) |
Amortized cost or cost |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Fair value |
||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 4,448 | $ | 1,060 | $ | — | $ | (5 | ) | $ | — | $ | 5,503 | |||||||||||
Tax-exempt |
328 | 17 | — | (43 | ) | — | 302 | |||||||||||||||||
Government—non-U.S. |
2,315 | 260 | — | (1 | ) | — | 2,574 | |||||||||||||||||
U.S. corporate |
23,062 | 3,368 | 20 | (144 | ) | — | 26,306 | |||||||||||||||||
Corporate—non-U.S. |
14,256 | 1,190 | — | (78 | ) | — | 15,368 | |||||||||||||||||
Residential mortgage-backed |
5,837 | 562 | 12 | (150 | ) | (142 | ) | 6,119 | ||||||||||||||||
Commercial mortgage-backed |
3,240 | 185 | 4 | (112 | ) | (31 | ) | 3,286 | ||||||||||||||||
Other asset-backed |
2,799 | 44 | — | (86 | ) | (1 | ) | 2,756 | ||||||||||||||||
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Total fixed maturity securities |
56,285 | 6,686 | 36 | (619 | ) | (174 | ) | 62,214 | ||||||||||||||||
Equity securities |
499 | 32 | — | (7 | ) | — | 524 | |||||||||||||||||
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Total available-for-sale securities |
$ | 56,784 | $ | 6,718 | $ | 36 | $ | (626 | ) | $ | (174 | ) | $ | 62,738 | ||||||||||
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As of December 31, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) |
Amortized cost or cost |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Fair value |
||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 3,946 | $ | 918 | $ | — | $ | (1 | ) | $ | — | $ | 4,863 | |||||||||||
Tax-exempt |
564 | 15 | — | (76 | ) | — | 503 | |||||||||||||||||
Government—non-U.S. |
2,017 | 196 | — | (2 | ) | — | 2,211 | |||||||||||||||||
U.S. corporate |
23,024 | 2,542 | 18 | (325 | ) | (1 | ) | 25,258 | ||||||||||||||||
Corporate—non-U.S. |
13,156 | 819 | — | (218 | ) | — | 13,757 | |||||||||||||||||
Residential mortgage-backed |
5,695 | 446 | 9 | (252 | ) | (203 | ) | 5,695 | ||||||||||||||||
Commercial mortgage-backed |
3,470 | 157 | 4 | (179 | ) | (52 | ) | 3,400 | ||||||||||||||||
Other asset-backed |
2,686 | 18 | — | (95 | ) | (1 | ) | 2,608 | ||||||||||||||||
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Total fixed maturity securities |
54,558 | 5,111 | 31 | (1,148 | ) | (257 | ) | 58,295 | ||||||||||||||||
Equity securities |
356 | 19 | — | (14 | ) | — | 361 | |||||||||||||||||
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Total available-for-sale securities |
$ | 54,914 | $ | 5,130 | $ | 31 | $ | (1,162 | ) | $ | (257 | ) | $ | 58,656 | ||||||||||
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The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2012:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair Value |
Gross unrealized losses (1) |
Number of securities |
Fair value |
Gross unrealized losses (2) |
Number of securities |
|||||||||||||||||||||||||||
Description of Securities |
||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 303 | $ | (5 | ) | 7 | $ | — | $ | — | — | $ | 303 | $ | (5 | ) | 7 | |||||||||||||||||||
Tax-exempt |
— | — | — | 129 | (43 | ) | 15 | 129 | (43 | ) | 15 | |||||||||||||||||||||||||
Government—non-U.S. |
— | — | — | 57 | (1 | ) | 10 | 57 | (1 | ) | 10 | |||||||||||||||||||||||||
U.S. corporate |
382 | (11 | ) | 72 | 938 | (133 | ) | 91 | 1,320 | (144 | ) | 163 | ||||||||||||||||||||||||
Corporate—non-U.S. |
468 | (13 | ) | 90 | 625 | (65 | ) | 61 | 1,093 | (78 | ) | 151 | ||||||||||||||||||||||||
Residential mortgage-backed |
120 | (2 | ) | 22 | 577 | (290 | ) | 304 | 697 | (292 | ) | 326 | ||||||||||||||||||||||||
Commercial mortgage-backed |
— | — | — | 830 | (143 | ) | 150 | 830 | (143 | ) | 150 | |||||||||||||||||||||||||
Other asset-backed |
141 | (1 | ) | 31 | 185 | (86 | ) | 20 | 326 | (87 | ) | 51 | ||||||||||||||||||||||||
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Subtotal, fixed maturity securities |
1,414 | (32 | ) | 222 | 3,341 | (761 | ) | 651 | 4,755 | (793 | ) | 873 | ||||||||||||||||||||||||
Equity securities |
91 | (5 | ) | 40 | 31 | (2 | ) | 20 | 122 | (7 | ) | 60 | ||||||||||||||||||||||||
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Total for securities in an unrealized loss position |
$ | 1,505 | $ | (37 | ) | 262 | $ | 3,372 | $ | (763 | ) | 671 | $ | 4,877 | $ | (800 | ) | 933 | ||||||||||||||||||
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% Below cost—fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
$ | 1,405 | $ | (30 | ) | 216 | $ | 2,434 | $ | (198 | ) | 371 | $ | 3,839 | $ | (228 | ) | 587 | ||||||||||||||||||
20%-50% Below cost |
9 | (2 | ) | 6 | 842 | (385 | ) | 188 | 851 | (387 | ) | 194 | ||||||||||||||||||||||||
>50% Below cost |
— | — | — | 65 | (178 | ) | 92 | 65 | (178 | ) | 92 | |||||||||||||||||||||||||
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Total fixed maturity securities |
1,414 | (32 | ) | 222 | 3,341 | (761 | ) | 651 | 4,755 | (793 | ) | 873 | ||||||||||||||||||||||||
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% Below cost—equity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
87 | (4 | ) | 39 | 28 | (1 | ) | 19 | 115 | (5 | ) | 58 | ||||||||||||||||||||||||
20%-50% Below cost |
4 | (1 | ) | 1 | 3 | (1 | ) | 1 | 7 | (2 | ) | 2 | ||||||||||||||||||||||||
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Total equity securities |
91 | (5 | ) | 40 | 31 | (2 | ) | 20 | 122 | (7 | ) | 60 | ||||||||||||||||||||||||
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Total for securities in an unrealized loss position |
$ | 1,505 | $ | (37 | ) | 262 | $ | 3,372 | $ | (763 | ) | 671 | $ | 4,877 | $ | (800 | ) | 933 | ||||||||||||||||||
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Investment grade |
$ | 1,283 | $ | (22 | ) | 203 | $ | 2,173 | $ | (293 | ) | 308 | $ | 3,456 | $ | (315 | ) | 511 | ||||||||||||||||||
Below investment grade (3) |
222 | (15 | ) | 59 | 1,199 | (470 | ) | 363 | 1,421 | (485 | ) | 422 | ||||||||||||||||||||||||
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Total for securities in an unrealized loss position |
$ | 1,505 | $ | (37 | ) | 262 | $ | 3,372 | $ | (763 | ) | 671 | $ | 4,877 | $ | (800 | ) | 933 | ||||||||||||||||||
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(1) |
Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities. |
(2) |
Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities. |
(3) |
Amounts that have been in a continuous loss position for 12 months or more included $171 million of unrealized losses on other-than-temporarily impaired securities. |
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2011:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses (1) |
Number of securities |
Fair value |
Gross unrealized losses (2) |
Number of securities |
|||||||||||||||||||||||||||
Description of Securities |
||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 160 | $ | (1 | ) | 2 | $ | — | $ | — | — | $ | 160 | $ | (1 | ) | 2 | |||||||||||||||||||
Tax-exempt |
— | — | — | 230 | (76 | ) | 72 | 230 | (76 | ) | 72 | |||||||||||||||||||||||||
Government—non-U.S. |
90 | (1 | ) | 25 | 8 | (1 | ) | 8 | 98 | (2 | ) | 33 | ||||||||||||||||||||||||
U.S. corporate |
1,721 | (68 | ) | 175 | 1,416 | (258 | ) | 136 | 3,137 | (326 | ) | 311 | ||||||||||||||||||||||||
Corporate—non-U.S. |
1,475 | (86 | ) | 188 | 705 | (132 | ) | 75 | 2,180 | (218 | ) | 263 | ||||||||||||||||||||||||
Residential mortgage-backed |
276 | (5 | ) | 68 | 727 | (450 | ) | 359 | 1,003 | (455 | ) | 427 | ||||||||||||||||||||||||
Commercial mortgage-backed |
282 | (36 | ) | 49 | 831 | (195 | ) | 159 | 1,113 | (231 | ) | 208 | ||||||||||||||||||||||||
Other asset-backed |
623 | (3 | ) | 83 | 309 | (93 | ) | 35 | 932 | (96 | ) | 118 | ||||||||||||||||||||||||
Subtotal, fixed maturity securites |
4,627 | (200 | ) | 590 | 4,226 | (1,205 | ) | 844 | 8,853 | (1,405 | ) | 1,434 | ||||||||||||||||||||||||
Equity securities |
92 | (11 | ) | 39 | 25 | (3 | ) | 13 | 117 | (14 | ) | 52 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 4,719 | $ | (211 | ) | 629 | $ | 4,251 | $ | (1,208 | ) | 857 | $ | 8,970 | $ | (1,419 | ) | 1,486 | ||||||||||||||||||
% Below cost—fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
$ | 4,545 | $ | (156 | ) | 548 | $ | 2,758 | $ | (252 | ) | 435 | $ | 7,303 | $ | (408 | ) | 983 | ||||||||||||||||||
20%-50% Below cost |
78 | (30 | ) | 27 | 1,335 | (653 | ) | 283 | 1,413 | (683 | ) | 310 | ||||||||||||||||||||||||
>50% Below cost |
4 | (14 | ) | 15 | 133 | (300 | ) | 126 | 137 | (314 | ) | 141 | ||||||||||||||||||||||||
Total fixed maturity securities |
4,627 | (200 | ) | 590 | 4,226 | (1,205 | ) | 844 | 8,853 | (1,405 | ) | 1,434 | ||||||||||||||||||||||||
% Below cost—equity securities: |
||||||||||||||||||||||||||||||||||||
<20% Below cost |
80 | (6 | ) | 36 | 21 | (1 | ) | 12 | 101 | (7 | ) | 48 | ||||||||||||||||||||||||
20%-50% Below cost |
12 | (5 | ) | 3 | 4 | (2 | ) | 1 | 16 | (7 | ) | 4 | ||||||||||||||||||||||||
Total equity securities |
92 | (11 | ) | 39 | 25 | (3 | ) | 13 | 117 | (14 | ) | 52 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 4,719 | $ | (211 | ) | 629 | $ | 4,251 | $ | (1,208 | ) | 857 | $ | 8,970 | $ | (1,419 | ) | 1,486 | ||||||||||||||||||
Investment grade |
$ | 4,292 | $ | (165 | ) | 502 | $ | 3,066 | $ | (577 | ) | 479 | $ | 7,358 | $ | (742 | ) | 981 | ||||||||||||||||||
Below investment grade (3) |
427 | (46 | ) | 127 | 1,185 | (631 | ) | 378 | 1,612 | (677 | ) | 505 | ||||||||||||||||||||||||
Total for securities in an unrealized loss position |
$ | 4,719 | $ | (211 | ) | 629 | $ | 4,251 | $ | (1,208 | ) | 857 | $ | 8,970 | $ | (1,419 | ) | 1,486 | ||||||||||||||||||
(1) |
Amounts included $248 million of unrealized losses on other-than-temporarily impaired securities. |
(2) |
Amounts included $257 million of unrealized losses on other-than-temporarily impaired securities. |
(3) |
Amounts that have been in a continuous loss position for 12 months or more included $235 million of unrealized losses on other-than-temporarily impaired securities. |
The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of September 30, 2012:
Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||
Tax-exempt |
$ | 114 | $ | (40 | ) | 5 | % | 10 | $ | — | $ | — | — | % | — | |||||||||||||||||
U.S. corporate |
138 | (44 | ) | 6 | 7 | — | — | — | — | |||||||||||||||||||||||
Corporate—non-U.S. |
29 | (17 | ) | 2 | 8 | 2 | (2 | ) | — | 1 | ||||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||||||
Residential mortgage-backed |
38 | (22 | ) | 3 | 17 | 6 | (12 | ) | 2 | 10 | ||||||||||||||||||||||
Commercial mortgage-backed |
18 | (7 | ) | 1 | 6 | — | (1 | ) | — | 1 | ||||||||||||||||||||||
Other asset-backed |
38 | (26 | ) | 3 | 4 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total structured securities |
94 | (55 | ) | 7 | 27 | 6 | (13 | ) | 2 | 11 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 375 | $ | (156 | ) | 20 | % | 52 | $ | 8 | $ | (15 | ) | 2 | % | 12 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Below Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||
U.S. corporate |
$ | 80 | $ | (32 | ) | 4 | % | 7 | $ | — | $ | — | — | % | — | |||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||||||
Residential mortgage-backed |
221 | (112 | ) | 14 | 95 | 40 | (124 | ) | 16 | 67 | ||||||||||||||||||||||
Commercial mortgage-backed |
117 | (49 | ) | 6 | 31 | 7 | (23 | ) | 3 | 10 | ||||||||||||||||||||||
Other asset-backed |
49 | (36 | ) | 5 | 3 | 10 | (16 | ) | 2 | 3 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total structured securities |
387 | (197 | ) | 25 | 129 | 57 | (163 | ) | 21 | 80 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 467 | $ | (229 | ) | 29 | % | 136 | $ | 57 | $ | (163 | ) | 21 | % | 80 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of September 30, 2012:
Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Industry: |
||||||||||||||||||||||||||||||||
Finance and insurance |
$ | 136 | $ | (52 | ) | 7 | % | 14 | $ | 2 | $ | (2 | ) | — | % | 1 | ||||||||||||||||
Consumer-non-cyclical |
31 | (9 | ) | 1 | 1 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 167 | $ | (61 | ) | 8 | % | 15 | $ | 2 | $ | (2 | ) | — | % | 1 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Below Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
Industry: |
||||||||||||||||||||||||||||||||
Finance and insurance |
$ | 66 | $ | (23 | ) | 3 | % | 4 | $ | — | $ | — | — | % | — | |||||||||||||||||
Consumer-non-cyclical |
11 | (8 | ) | 1 | 2 | — | — | — | — | |||||||||||||||||||||||
Transportation |
3 | (1 | ) | — | 1 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 80 | $ | (32 | ) | 4 | % | 7 | $ | — | $ | — | — | % | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturity distribution of fixed maturity securities as of September 30, 2012 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
(Amounts in millions) |
Amortized cost or cost |
Fair value |
||||||
Due one year or less |
$ | 3,058 | $ | 3,097 | ||||
Due after one year through five years |
10,639 | 11,162 | ||||||
Due after five years through ten years |
10,916 | 12,009 | ||||||
Due after ten years |
19,796 | 23,785 | ||||||
|
|
|
|
|||||
Subtotal |
44,409 | 50,053 | ||||||
Residential mortgage-backed |
5,837 | 6,119 | ||||||
Commercial mortgage-backed |
3,240 | 3,286 | ||||||
Other asset-backed |
2,799 | 2,756 | ||||||
|
|
|
|
|||||
Total |
$ | 56,285 | $ | 62,214 | ||||
|
|
|
|
We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Property type: |
||||||||||||||||
Retail |
$ | 1,882 | 32 | % | $ | 1,898 | 31 | % | ||||||||
Industrial |
1,633 | 27 | 1,707 | 28 | ||||||||||||
Office |
1,533 | 26 | 1,590 | 26 | ||||||||||||
Apartments |
578 | 10 | 641 | 10 | ||||||||||||
Mixed use/other |
277 | 5 | 304 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
5,903 | 100 | % | 6,140 | 100 | % | ||||||||||
|
|
|
|
|||||||||||||
Unamortized balance of loan origination fees and costs |
2 | 3 | ||||||||||||||
Allowance for losses |
(44 | ) | (51 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 5,861 | $ | 6,092 | ||||||||||||
|
|
|
|
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Geographic region: |
||||||||||||||||
South Atlantic |
$ | 1,619 | 27 | % | $ | 1,631 | 27 | % | ||||||||
Pacific |
1,526 | 26 | 1,539 | 25 | ||||||||||||
Middle Atlantic |
710 | 12 | 734 | 12 | ||||||||||||
East North Central |
513 | 9 | 557 | 9 | ||||||||||||
Mountain |
442 | 7 | 497 | 8 | ||||||||||||
New England |
342 | 6 | 388 | 6 | ||||||||||||
West North Central |
339 | 6 | 337 | 5 | ||||||||||||
West South Central |
260 | 4 | 298 | 5 | ||||||||||||
East South Central |
152 | 3 | 159 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
5,903 | 100 | % | 6,140 | 100 | % | ||||||||||
|
|
|
|
|||||||||||||
Unamortized balance of loan origination fees and costs |
2 | 3 | ||||||||||||||
Allowance for losses |
(44 | ) | (51 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 5,861 | $ | 6,092 | ||||||||||||
|
|
|
|
The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
31 - 60 days past due |
61 - 90 days past due |
Greater than 90 days past due |
Total past due |
Current | Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 7 | $ | 3 | $ | 3 | $ | 13 | $ | 1,869 | $ | 1,882 | ||||||||||||
Industrial |
— | — | — | — | 1,633 | 1,633 | ||||||||||||||||||
Office |
— | — | 4 | 4 | 1,529 | 1,533 | ||||||||||||||||||
Apartments |
— | — | 2 | 2 | 576 | 578 | ||||||||||||||||||
Mixed use/other |
67 | — | — | 67 | 210 | 277 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recorded investment |
$ | 74 | $ | 3 | $ | 9 | $ | 86 | $ | 5,817 | $ | 5,903 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total commercial mortgage loans |
1 | % | — | % | — | % | 1 | % | 99 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
31 - 60 days past due |
61 - 90 days past due |
Greater than 90 days past due |
Total past due |
Current | Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 107 | $ | — | $ | — | $ | 107 | $ | 1,791 | $ | 1,898 | ||||||||||||
Industrial |
3 | — | — | 3 | 1,704 | 1,707 | ||||||||||||||||||
Office |
4 | 3 | 15 | 22 | 1,568 | 1,590 | ||||||||||||||||||
Apartments |
— | — | — | — | 641 | 641 | ||||||||||||||||||
Mixed use/other |
1 | — | — | 1 | 303 | 304 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recorded investment |
$ | 115 | $ | 3 | $ | 15 | $ | 133 | $ | 6,007 | $ | 6,140 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total commercial mortgage loans |
2 | % | — | % | — | % | 2 | % | 98 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Allowance for credit losses: |
||||||||||||||||
Beginning balance |
$ | 46 | $ | 57 | $ | 51 | $ | 59 | ||||||||
Charge-offs |
(3 | ) | — | (4 | ) | (5 | ) | |||||||||
Recoveries |
— | — | — | — | ||||||||||||
Provision |
1 | (3 | ) | (3 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 44 | $ | 54 | $ | 44 | $ | 54 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending allowance for individually impaired loans |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending allowance for loans not individually impaired that were evaluated collectively for impairment |
$ | 44 | $ | 54 | $ | 44 | $ | 54 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Recorded investment: |
||||||||||||||||
Ending balance |
$ | 5,903 | $ | 6,321 | $ | 5,903 | $ | 6,321 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance of individually impaired loans |
$ | 8 | $ | 13 | $ | 8 | $ | 13 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance of loans not individually impaired that were evaluated collectively for impairment |
$ | 5,895 | $ | 6,308 | $ | 5,895 | $ | 6,308 | ||||||||
|
|
|
|
|
|
|
|
The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 560 | $ | 298 | $ | 809 | $ | 177 | $ | 38 | $ | 1,882 | ||||||||||||
Industrial |
528 | 244 | 600 | 220 | 41 | 1,633 | ||||||||||||||||||
Office |
361 | 236 | 598 | 277 | 61 | 1,533 | ||||||||||||||||||
Apartments |
188 | 143 | 203 | 29 | 15 | 578 | ||||||||||||||||||
Mixed use/other |
70 | 32 | 88 | 81 | 6 | 277 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,707 | $ | 953 | $ | 2,298 | $ | 784 | $ | 161 | $ | 5,903 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
29 | % | 16 | % | 39 | % | 13 | % | 3 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average debt service coverage ratio |
2.14 | 1.73 | 2.13 | 1.55 | 1.14 | 1.97 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Included $8 million of impaired loans and $153 million of loans in good standing, with a total weighted-average loan-to-value of 144%, where borrowers continued to make timely payments and have no history of delinquencies or distress. |
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 453 | $ | 247 | $ | 900 | $ | 268 | $ | 30 | $ | 1,898 | ||||||||||||
Industrial |
445 | 332 | 642 | 261 | 27 | 1,707 | ||||||||||||||||||
Office |
364 | 281 | 546 | 283 | 116 | 1,590 | ||||||||||||||||||
Apartments |
164 | 110 | 321 | 31 | 15 | 641 | ||||||||||||||||||
Mixed use/other |
81 | 47 | 89 | 15 | 72 | 304 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,507 | $ | 1,017 | $ | 2,498 | $ | 858 | $ | 260 | $ | 6,140 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
25 | % | 17 | % | 40 | % | 14 | % | 4 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average debt service coverage ratio |
2.28 | 1.89 | 2.16 | 1.19 | 2.26 | 2.01 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Included $260 million of loans in good standing, with a total weighted-average loan-to-value of 117%, where borrowers continued to make timely payments and have no history of delinquencies or distress. |
The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 110 | $ | 298 | $ | 388 | $ | 573 | $ | 408 | $ | 1,777 | ||||||||||||
Industrial |
187 | 149 | 343 | 643 | 305 | 1,627 | ||||||||||||||||||
Office |
148 | 172 | 309 | 494 | 326 | 1,449 | ||||||||||||||||||
Apartments |
9 | 51 | 90 | 287 | 141 | 578 | ||||||||||||||||||
Mixed use/other |
33 | 21 | 38 | 67 | 51 | 210 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 487 | $ | 691 | $ | 1,168 | $ | 2,064 | $ | 1,231 | $ | 5,641 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
9 | % | 12 | % | 21 | % | 36 | % | 22 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average loan-to-value |
83 | % | 71 | % | 65 | % | 60 | % | 45 | % | 61 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 91 | $ | 322 | $ | 445 | $ | 595 | $ | 340 | $ | 1,793 | ||||||||||||
Industrial |
197 | 238 | 278 | 652 | 334 | 1,699 | ||||||||||||||||||
Office |
188 | 130 | 341 | 395 | 452 | 1,506 | ||||||||||||||||||
Apartments |
15 | 80 | 76 | 295 | 174 | 640 | ||||||||||||||||||
Mixed use/other |
22 | 23 | 53 | 61 | 59 | 218 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 513 | $ | 793 | $ | 1,193 | $ | 1,998 | $ | 1,359 | $ | 5,856 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
9 | % | 14 | % | 20 | % | 34 | % | 23 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average loan-to-value |
86 | % | 72 | % | 68 | % | 59 | % | 50 | % | 63 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the debt service coverage ratio for floating rate commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | — | $ | — | $ | 1 | $ | — | $ | 104 | $ | 105 | ||||||||||||
Industrial |
— | — | — | — | 6 | 6 | ||||||||||||||||||
Office |
— | — | 8 | — | 76 | 84 | ||||||||||||||||||
Apartments |
— | — | — | — | — | — | ||||||||||||||||||
Mixed use/other |
— | — | — | — | 67 | 67 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | — | $ | — | $ | 9 | $ | — | $ | 253 | $ | 262 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
— | % | — | % | 3 | % | — | % | 97 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average loan-to-value |
— | % | — | % | 54 | % | — | % | 68 | % | 67 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | — | $ | — | $ | 1 | $ | — | $ | 104 | $ | 105 | ||||||||||||
Industrial |
— | — | — | 5 | 3 | 8 | ||||||||||||||||||
Office |
— | — | 8 | — | 76 | 84 | ||||||||||||||||||
Apartments |
— | — | — | — | 1 | 1 | ||||||||||||||||||
Mixed use/other |
— | — | — | — | 86 | 86 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | — | $ | — | $ | 9 | $ | 5 | $ | 270 | $ | 284 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
— | % | — | % | 3 | % | 2 | % | 95 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average loan-to-value |
— | % | — | % | 54 | % | 44 | % | 74 | % | 72 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Property type: |
||||||||||||||||
Retail |
$ | 148 | 41 | % | $ | 161 | 38 | % | ||||||||
Industrial |
85 | 24 | 99 | 24 | ||||||||||||
Office |
66 | 18 | 86 | 21 | ||||||||||||
Apartments |
57 | 16 | 60 | 15 | ||||||||||||
Mixed use/other |
5 | 1 | 7 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
361 | 100 | % | 413 | 100 | % | ||||||||||
|
|
|
|
|||||||||||||
Allowance for losses |
(2 | ) | (2 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 359 | $ | 411 | ||||||||||||
|
|
|
|
September 30, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
Geographic region: |
||||||||||||||||
South Atlantic |
$ | 132 | 37 | % | $ | 146 | 35 | % | ||||||||
Pacific |
62 | 17 | 74 | 18 | ||||||||||||
Middle Atlantic |
56 | 16 | 65 | 16 | ||||||||||||
East North Central |
36 | 10 | 42 | 10 | ||||||||||||
West North Central |
26 | 7 | 28 | 7 | ||||||||||||
Mountain |
22 | 6 | 28 | 7 | ||||||||||||
East South Central |
16 | 4 | 17 | 4 | ||||||||||||
West South Central |
11 | 3 | 12 | 3 | ||||||||||||
New England |
— | — | 1 | — | ||||||||||||
Subtotal |
361 | 100 | % | 413 | 100 | % | ||||||||||
Allowance for losses |
(2 | ) | (2 | ) | ||||||||||||
Total |
$ | 359 | $ | 411 | ||||||||||||
The following tables set forth the loan-to-value of restricted commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 134 | $ | 4 | $ | 7 | $ | — | $ | 3 | $ | 148 | ||||||||||||
Industrial |
80 | — | 3 | 2 | — | 85 | ||||||||||||||||||
Office |
51 | 8 | 1 | 6 | — | 66 | ||||||||||||||||||
Apartments |
32 | 4 | 21 | — | — | 57 | ||||||||||||||||||
Mixed use/other |
5 | — | — | — | — | 5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recorded investments |
$ | 302 | $ | 16 | $ | 32 | $ | 8 | $ | 3 | $ | 361 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
83 | % | 5 | % | 9 | % | 2 | % | 1 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average debt service coverage ratio |
1.78 | 1.38 | 1.14 | 0.86 | 0.54 | 1.68 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 147 | $ | 9 | $ | 2 | $ | — | $ | 3 | $ | 161 | ||||||||||||
Industrial |
87 | 5 | — | 5 | 2 | 99 | ||||||||||||||||||
Office |
63 | 9 | 6 | 6 | 2 | 86 | ||||||||||||||||||
Apartments |
34 | 3 | — | 23 | — | 60 | ||||||||||||||||||
Mixed use/other |
7 | — | — | — | — | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recorded investments |
$ | 338 | $ | 26 | $ | 8 | $ | 34 | $ | 7 | $ | 413 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
82 | % | 6 | % | 2 | % | 8 | % | 2 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average debt service coverage ratio |
1.78 | 1.16 | 2.07 | 0.88 | 0.49 | 1.65 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the debt service coverage ratio for fixed rate restricted commercial mortgage loans by property type as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 6 | $ | 16 | $ | 36 | $ | 40 | $ | 50 | $ | 148 | ||||||||||||
Industrial |
12 | 4 | 14 | 38 | 17 | 85 | ||||||||||||||||||
Office |
5 | 23 | 14 | 12 | 12 | 66 | ||||||||||||||||||
Apartments |
— | 20 | 11 | 22 | 4 | 57 | ||||||||||||||||||
Mixed use/other |
— | — | — | 2 | 3 | 5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recorded investments |
$ | 23 | $ | 63 | $ | 75 | $ | 114 | $ | 86 | $ | 361 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
6 | % | 17 | % | 21 | % | 32 | % | 24 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average loan-to-value |
51 | % | 53 | % | 37 | % | 31 | % | 29 | % | 37 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 |
Total | ||||||||||||||||||
Property type: |
||||||||||||||||||||||||
Retail |
$ | 5 | $ | 17 | $ | 49 | $ | 62 | $ | 28 | $ | 161 | ||||||||||||
Industrial |
15 | 10 | 21 | 23 | 30 | 99 | ||||||||||||||||||
Office |
12 | 23 | 4 | 37 | 10 | 86 | ||||||||||||||||||
Apartments |
12 | 14 | 7 | 22 | 5 | 60 | ||||||||||||||||||
Mixed use/other |
— | — | — | 2 | 5 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recorded investments |
$ | 44 | $ | 64 | $ | 81 | $ | 146 | $ | 78 | $ | 413 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
% of total |
10 | % | 16 | % | 20 | % | 35 | % | 19 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average loan-to-value |
73 | % | 48 | % | 39 | % | 36 | % | 28 | % | 41 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our positions in derivative instruments as of the dates indicated:
Derivative assets | Derivative liabilities | |||||||||||||||||||
Balance sheet classification |
Fair value | Balance sheet classification |
Fair value | |||||||||||||||||
(Amounts in millions) |
September 30, 2012 |
December 31, 2011 |
September 30, 2012 |
December 31, 2011 |
||||||||||||||||
Derivatives designated as hedges |
||||||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||
Interest rate swaps |
Other invested assets | $ | 546 | $ | 602 | Other liabilities | $ | 2 | $ | 1 | ||||||||||
Inflation indexed swaps |
Other invested assets | — | — | Other liabilities | 98 | 43 | ||||||||||||||
Foreign currency swaps |
Other invested assets | 1 | — | Other liabilities | 1 | — | ||||||||||||||
Forward bond purchase commitments |
Other invested assets | 68 | 47 | Other liabilities | — | — | ||||||||||||||
Total cash flow hedges |
615 | 649 | 101 | 44 | ||||||||||||||||
Fair value hedges: |
||||||||||||||||||||
Interest rate swaps |
Other invested assets | 19 | 43 | Other liabilities | — | 1 | ||||||||||||||
Foreign currency swaps |
Other invested assets | 29 | 32 | Other liabilities | — | — | ||||||||||||||
Total fair value hedges |
48 | 75 | — | 1 | ||||||||||||||||
Total derivatives designated as hedges |
663 | 724 | 101 | 45 | ||||||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
Interest rate swaps |
Other invested assets | 691 | 705 | Other liabilities | 352 | 374 | ||||||||||||||
Interest rate swaps related to securitization entities |
Restricted other invested assets |
— | — | Other liabilities | 29 | 28 | ||||||||||||||
Credit default swaps |
Other invested assets | 6 | 1 | Other liabilities | 9 | 59 | ||||||||||||||
Credit default swaps related to securitization entities |
Restricted other invested assets |
— | — | Other liabilities | 136 | 177 | ||||||||||||||
Equity index options |
Other invested assets | 24 | 39 | Other liabilities | — | — | ||||||||||||||
Financial futures |
Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||
Equity return swaps |
Other invested assets | — | 7 | Other liabilities | 7 | 4 | ||||||||||||||
Other foreign currency contracts |
Other invested assets | — | 9 | Other liabilities | 6 | 11 | ||||||||||||||
Reinsurance embedded derivatives (1) |
Other assets | 33 | 29 | Other liabilities | — | — | ||||||||||||||
GMWB embedded |
Reinsurance recoverable (2) |
11 | 16 | Policyholder account balances (3) |
380 | 492 | ||||||||||||||
Fixed index annuity embedded derivatives |
Other assets (4) | — | — | Policyholder account balances (4) |
21 | 4 | ||||||||||||||
Total derivatives not designated as hedges |
765 | 806 | 940 | 1,149 | ||||||||||||||||
Total derivatives |
$ | 1,428 | $ | 1,530 | $ | 1,041 | $ | 1,194 | ||||||||||||
(1) |
Represents embedded derivatives associated with certain reinsurance agreements. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities. |
(3) |
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(4) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) |
Measurement | December 31, 2011 |
Additions | Maturities/ terminations |
September 30, 2012 |
|||||||||||||||
Derivatives designated as hedges |
||||||||||||||||||||
Cash flow hedges: |
||||||||||||||||||||
Interest rate swaps |
Notional | $ | 12,399 | $ | — | $ | (2,082 | ) | $ | 10,317 | ||||||||||
Inflation indexed swaps |
Notional | 544 | 10 | — | 554 | |||||||||||||||
Foreign currency swaps |
Notional | — | 185 | (75 | ) | 110 | ||||||||||||||
Forward bond purchase commitments |
Notional | 504 | — | — | 504 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total cash flow hedges |
13,447 | 195 | (2,157 | ) | 11,485 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Fair value hedges: |
||||||||||||||||||||
Interest rate swaps |
Notional | 1,039 | — | (314 | ) | 725 | ||||||||||||||
Foreign currency swaps |
Notional | 85 | — | — | 85 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total fair value hedges |
1,124 | — | (314 | ) | 810 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives designated as hedges |
14,571 | 195 | (2,471 | ) | 12,295 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
Interest rate swaps |
Notional | 7,200 | 2,530 | (2,332 | ) | 7,398 | ||||||||||||||
Interest rate swaps related to securitization entities |
Notional | 117 | — | (9 | ) | 108 | ||||||||||||||
Credit default swaps |
Notional | 1,110 | 100 | (230 | ) | 980 | ||||||||||||||
Credit default swaps related to securitization entities |
Notional | 314 | — | (2 | ) | 312 | ||||||||||||||
Equity index options |
Notional | 522 | 1,121 | (592 | ) | 1,051 | ||||||||||||||
Financial futures |
Notional | 2,924 | 4,228 | (5,110 | ) | 2,042 | ||||||||||||||
Equity return swaps |
Notional | 326 | 191 | (342 | ) | 175 | ||||||||||||||
Other foreign currency contracts |
Notional | 779 | 358 | (1,084 | ) | 53 | ||||||||||||||
Reinsurance embedded derivatives |
Notional | 228 | 53 | — | 281 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives not designated as hedges |
13,520 | 8,581 | (9,701 | ) | 12,400 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives |
$ | 28,091 | $ | 8,776 | $ | (12,172 | ) | $ | 24,695 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
(Number of policies) |
Measurement | December 31, 2011 |
Additions | Maturities/ terminations |
September 30, 2012 |
|||||||||||||||
Derivatives not designated as hedges |
||||||||||||||||||||
GMWB embedded derivatives |
Policies | 47,714 | — | (2,010 | ) | 45,704 | ||||||||||||||
Fixed index annuity embedded derivatives |
Policies | 433 | 937 | (10 | ) | 1,360 |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2012:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||||||
Interest rate swaps hedging assets |
$ | (83 | ) | $ | 9 |
|
Net investment income |
|
$ | (6 | ) |
|
Net investment gains (losses) |
|
||||||
Interest rate swaps hedging assets |
— | 1 |
|
Net investment gains (losses) |
|
— | |
Net investment gains (losses) |
|
|||||||||||
Forward bond purchase commitments |
2 | — | |
Net investment income |
|
— | |
Net investment gains (losses) |
|
|||||||||||
Inflation indexed swaps |
(23 | ) | 3 | |
Net investment income |
|
— | |
Net investment gains (losses) |
|
||||||||||
Foreign currency swaps |
1 | — |
|
Interest expense |
|
— | |
Net investment gains (losses) |
|
|||||||||||
|
|
|
|
|
|
|||||||||||||||
Total |
$ | (103 | ) | $ | 13 | $ | (6 | ) | ||||||||||||
|
|
|
|
|
|
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2011:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||||
Interest rate swaps hedging assets |
$ | 1,529 | $ | 9 | Net investment income |
$ | 49 |
|
Net investment gains (losses) |
|
||||||||
Interest rate swaps hedging assets |
— | 2 | Net investment gains (losses) |
— | |
Net investment gains (losses) |
|
|||||||||||
Forward bond purchase commitments |
37 | — | Net investment income |
— | |
Net investment gains (losses) |
|
|||||||||||
Inflation indexed swaps |
19 | (3 | ) | Net investment income |
— | |
Net investment gains (losses) |
|
||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,585 | $ | 8 | $ | 49 | ||||||||||||
|
|
|
|
|
|
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2012:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||||
Interest rate swaps hedging assets |
$ | 60 | $ | 28 | |
Net investment income |
|
$ | (6 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging assets |
— | 2 | |
Net investment gains (losses) |
|
— | Net investment gains (losses) |
|||||||||||
Interest rate swaps hedging liabilities |
— | 1 | Interest expense | — | Net investment gains (losses) |
|||||||||||||
Forward bond purchase commitments |
22 | — | |
Net investment income |
|
— | Net investment gains (losses) |
|||||||||||
Inflation indexed swaps |
(54 | ) | (6 | ) | |
Net investment income |
|
— | Net investment gains (losses) |
|||||||||
Foreign currency swaps |
2 | — | Interest expense | — | Net investment gains (losses) |
|||||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | 30 | $ | 25 | $ | (6 | ) | |||||||||||
|
|
|
|
|
|
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2011:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain (loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain (loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||||
Interest rate swaps hedging assets |
$ | 1,568 | $ | 19 | |
Net investment income |
|
$ | 49 | Net investment gains (losses) |
||||||||
Interest rate swaps hedging assets |
— | 2 | |
Net investment gains (losses) |
|
— | Net investment gains (losses) |
|||||||||||
Interest rate swaps hedging liabilities |
— | 1 | Interest expense | — | Net investment gains (losses) |
|||||||||||||
Forward bond purchase commitments |
37 | — | |
Net investment income |
|
— | Net investment gains (losses) |
|||||||||||
Inflation indexed swaps |
(8 | ) | (24 | ) | |
Net investment income |
|
— | Net investment gains (losses) |
|||||||||
Foreign currency swaps |
4 | (5 | ) | Interest expense | — | Net investment gains (losses) |
||||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,601 | $ | (7 | ) | $ | 49 | |||||||||||
|
|
|
|
|
|
(1) |
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following tables provide a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:
Three months
ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Derivatives qualifying as effective accounting hedges as of July 1 |
$ | 2,087 | $ | 943 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $31 and $(563) |
(72 | ) | 1,022 | |||||
Reclassification to net (income) loss, net of deferred taxes of $9 and $3 |
(4 | ) | (5 | ) | ||||
|
|
|
|
|||||
Derivatives qualifying as effective accounting hedges as of September 30 |
$ | 2,011 | $ | 1,960 | ||||
|
|
|
|
|||||
Nine months ended September 30, |
||||||||
(Amounts in millions) |
2012 | 2011 | ||||||
Derivatives qualifying as effective accounting hedges as of January 1 |
$ | 2,009 | $ | 924 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $(12) and $(569) |
18 | 1,032 | ||||||
Reclassification to net (income) loss, net of deferred taxes of $9 and $(3) |
(16 | ) | 4 | |||||
|
|
|
|
|||||
Derivatives qualifying as effective accounting hedges as of September 30 |
$ | 2,011 | $ | 1,960 | ||||
|
|
|
|
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2012:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income(loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | — | Net investment gains (losses) |
$ | — | Net investment income |
$ | — | Net investment gains (losses) |
|||||||||
Interest rate swaps hedging liabilities |
(4 | ) | Net investment gains (losses) |
8 | Interest credited |
4 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
— | Net investment gains (losses) |
1 | Interest credited |
— | Net investment gains (losses) |
||||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | (4 | ) | $ | 9 | $ | 4 | |||||||||||
|
|
|
|
|
|
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2011:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income(loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | 1 | Net investment gains (losses) |
$ | (2 | ) | Net investment income |
$ | (1 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging liabilities |
(10 | ) | Net investment gains (losses) |
16 | Interest credited |
10 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
(9 | ) | Net investment gains (losses) |
1 | Interest credited |
10 | Net investment gains (losses) |
|||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | (18 | ) | $ | 15 | $ | 19 | |||||||||||
|
|
|
|
|
|
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2012:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income(loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | 1 | Net investment gains (losses) |
$ | (3 | ) | Net investment income |
$ | (1 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging liabilities |
(23 | ) | Net investment gains (losses) |
29 | Interest credited |
23 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
(3 | ) | Net investment gains (losses) |
2 | Interest credited |
3 | Net investment gains (losses) |
|||||||||||
|
|
|
|
|
|
|
||||||||||||
Total |
$ | (25 | ) | $ | 28 | $ | 25 | |||||||||||
|
|
|
|
|
|
|
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2011:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income(loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (losses) recognized in net income (loss) |
||||||||||||
Interest rate swaps hedging assets |
$ | 3 | Net investment gains (losses) |
$ | (7 | ) | Net investment income |
$ | (3 | ) | Net investment gains (losses) |
|||||||
Interest rate swaps hedging liabilities |
(39 | ) | Net investment gains (losses) |
53 | Interest credited |
39 | Net investment gains (losses) |
|||||||||||
Foreign currency swaps |
2 | Net investment gains (losses) |
2 | Interest credited |
(2 | ) | Net investment gains (losses) |
|||||||||||
|
|
|
|
|
|
|||||||||||||
Total |
$ | (34 | ) | $ | 48 | $ | 34 | |||||||||||
|
|
|
|
|
|
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended September 30, | Classification of gain (loss) recognized in net income (loss) |
|||||||||
(Amounts in millions) |
2012 | 2011 | ||||||||
Interest rate swaps |
$ | 1 | $ | 9 | Net investment gains (losses) | |||||
Interest rate swaps related to securitization entities |
(1 | ) | (12 | ) | Net investment gains (losses) | |||||
Credit default swaps |
25 | (70 | ) | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities |
20 | (54 | ) | Net investment gains (losses) | ||||||
Equity index options |
(17 | ) | 59 | Net investment gains (losses) | ||||||
Financial futures |
(70 | ) | 266 | Net investment gains (losses) | ||||||
Equity return swaps |
(11 | ) | 22 | Net investment gains (losses) | ||||||
Other foreign currency contracts |
(2 | ) | 13 | Net investment gains (losses) | ||||||
Reinsurance embedded derivatives |
(1 | ) | 27 | Net investment gains (losses) | ||||||
GMWB embedded derivatives |
79 | (454 | ) | Net investment gains (losses) | ||||||
Fixed index annuity embedded derivatives |
(1 | ) | 1 | Net investment gains (losses) | ||||||
|
|
|
|
|||||||
Total derivatives not designated as hedges |
$ | 22 | $ | (193 | ) | |||||
|
|
|
|
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Nine months ended September 30, | Classification of gain (loss) recognized in net income (loss) |
|||||||||
(Amounts in millions) |
2012 | 2011 | ||||||||
Interest rate swaps |
$ | 18 | $ | 13 | Net investment gains (losses) | |||||
Interest rate swaps related to securitization entities |
(4 | ) | (15 | ) | Net investment gains (losses) | |||||
Credit default swaps |
47 | (67 | ) | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities |
43 | (49 | ) | Net investment gains (losses) | ||||||
Equity index options |
(46 | ) | 31 | Net investment gains (losses) | ||||||
Financial futures |
(109 | ) | 261 | Net investment gains (losses) | ||||||
Equity return swaps |
(25 | ) | 12 | Net investment gains (losses) | ||||||
Other foreign currency contracts |
(19 | ) | — | Net investment gains (losses) | ||||||
Reinsurance embedded derivatives |
4 | 26 | Net investment gains (losses) | |||||||
GMWB embedded derivatives |
132 | (428 | ) | Net investment gains (losses) | ||||||
Fixed index annuity embedded derivatives |
(2 | ) | 1 | Net investment gains (losses) | ||||||
|
|
|
|
|||||||
Total derivatives not designated as hedges |
$ | 39 | $ | (215 | ) | |||||
|
|
|
|
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||||||||
Reference entity credit rating and maturity: |
||||||||||||||||||||||||
AAA |
||||||||||||||||||||||||
Matures in less than one year |
$ | 5 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Matures after one year through five years |
— | — | — | 5 | — | — | ||||||||||||||||||
AA |
||||||||||||||||||||||||
Matures in less than one year |
6 | — | — | — | — | — | ||||||||||||||||||
Matures after one year through five years |
— | — | — | 6 | — | — | ||||||||||||||||||
Matures after five years through ten years |
5 | — | — | 5 | — | — | ||||||||||||||||||
A |
||||||||||||||||||||||||
Matures in less than one year |
37 | — | — | — | — | — | ||||||||||||||||||
Matures after one year through five years |
— | — | — | 37 | — | — | ||||||||||||||||||
Matures after five years through ten years |
10 | — | — | 10 | — | 1 | ||||||||||||||||||
BBB |
||||||||||||||||||||||||
Matures in less than one year |
68 | 1 | — | — | — | — | ||||||||||||||||||
Matures after one year through five years |
— | — | — | 68 | 1 | — | ||||||||||||||||||
Matures after five years through ten years |
24 | — | — | 24 | — | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total credit default swaps on single name reference entities |
$ | 155 | $ | 1 | $ | — | $ | 155 | $ | 1 | $ | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||||||||
Original index tranche attachment/detachment point and maturity: |
||||||||||||||||||||||||
7% – 15% matures after one year through five years (1) |
$ | 100 | $ | — | $ | 2 | $ | — | $ | — | $ | — | ||||||||||||
9% – 12% matures in less than one year (2) |
50 | — | — | — | — | — | ||||||||||||||||||
9% – 12% matures after one year through five years (2) |
250 | — | 5 | 300 | — | 27 | ||||||||||||||||||
10% – 15% matures after one year through five years (3) |
250 | 4 | — | 250 | — | — | ||||||||||||||||||
12% – 22% matures after five years through ten years (4) |
48 | — | 2 | 248 | — | 28 | ||||||||||||||||||
15% – 30% matures after five years through ten years (5) |
127 | 1 | — | 127 | — | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total credit default swap index tranches |
825 | 5 | 9 | 925 | — | 57 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Customized credit default swap index tranches related to securitization entities: |
||||||||||||||||||||||||
Portion backing third-party borrowings maturing 2017 (6) |
12 | — | 5 | 14 | — | 7 | ||||||||||||||||||
Portion backing our interest maturing 2017 (7) |
300 | — | 131 | 300 | — | 170 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total customized credit default swap index tranches related to securitization entities |
312 | — | 136 | 314 | — | 177 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total credit default swaps on index tranches |
$ | 1,137 | $ | 5 | $ | 145 | $ | 1,239 | $ | — | $ | 234 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The current attachment/detachment as of September 30, 2012 was 7% – 15%. |
(2) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 9% – 12%. |
(3) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 10% – 15%. |
(4) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 12% – 22%. |
(5) |
The current attachment/detachment as of September 30, 2012 and December 31, 2011 was 14.8% – 30.3%. |
(6) |
Original notional value was $39 million. |
(7) |
Original notional value was $300 million. |
|
The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
September 30, 2012 | ||||||||||||||||||||||||
(Amounts in millions) |
Notional amount |
Carrying amount |
Fair value | |||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Commercial mortgage loans |
$ | (1) | $ | 5,861 | $ | — | $ | — | $ | 6,380 | $ | 6,380 | ||||||||||||
Restricted commercial mortgage loans |
(1) | 359 | — | — | 410 | 410 | ||||||||||||||||||
Other invested assets |
(1) | 250 | — | 134 | 123 | 257 | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Long-term borrowings (2) |
(1) | 4,880 | — | 4,703 | 146 | 4,849 | ||||||||||||||||||
Non-recourse funding obligations (2) |
(1) | 2,325 | — | — | 1,567 | 1,567 | ||||||||||||||||||
Borrowings related to securitization entities |
(1) | 293 | — | 253 | 71 | 324 | ||||||||||||||||||
Investment contracts |
(1) | 18,581 | — | 1,027 | 18,689 | 19,716 | ||||||||||||||||||
Other firm commitments: |
||||||||||||||||||||||||
Commitments to fund limited partnerships |
57 | — | — | — | — | — | ||||||||||||||||||
Ordinary course of business lending commitments |
98 | — | — | — | — | — |
December 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) |
Notional amount |
Carrying amount |
Fair value | |||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Commercial mortgage loans |
$ | (1) | $ | 6,092 | $ | — | $ | — | $ | 6,500 | $ | 6,500 | ||||||||||||
Restricted commercial mortgage loans |
(1) | 411 | — | — | 461 | 461 | ||||||||||||||||||
Other invested assets |
(1) | 786 | — | 658 | 137 | 795 | ||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||
Long-term borrowings (2) |
(1) | 4,726 | — | 4,214 | 139 | 4,353 | ||||||||||||||||||
Non-recourse funding obligations (2) |
(1) | 3,256 | — | — | 2,160 | 2,160 | ||||||||||||||||||
Borrowings related to securitization entities |
(1) | 348 | — | 287 | 88 | 375 | ||||||||||||||||||
Investment contracts |
(1) | 18,880 | — | 1,356 | 18,325 | 19,681 | ||||||||||||||||||
Other firm commitments: |
||||||||||||||||||||||||
Commitments to fund limited partnerships |
78 | — | — | — | — | — | ||||||||||||||||||
Ordinary course of business lending commitments |
9 | — | — | — | — | — |
(1) |
These financial instruments do not have notional amounts. |
(2) |
See note 8 for additional information related to borrowings. |
The following tables summarize the primary sources of data considered when determining fair value of each class of fixed maturity securities as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: |
||||||||||||||||
Pricing services |
$ | 5,494 | $ | — | $ | 5,494 | $ | — | ||||||||
Internal models |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. government, agencies and government-sponsored enterprises |
5,503 | — | 5,494 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Tax-exempt: |
||||||||||||||||
Pricing services |
302 | — | 302 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total tax-exempt |
302 | — | 302 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Government—non-U.S.: |
||||||||||||||||
Pricing services |
2,566 | — | 2,566 | — | ||||||||||||
Internal models |
8 | — | — | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total government—non-U.S. |
2,574 | — | 2,566 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. corporate: |
||||||||||||||||
Pricing services |
23,298 | — | 23,298 | — | ||||||||||||
Broker quotes |
138 | — | — | 138 | ||||||||||||
Internal models |
2,870 | — | 259 | 2,611 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. corporate |
26,306 | — | 23,557 | 2,749 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Corporate—non-U.S.: |
||||||||||||||||
Pricing services |
13,308 | — | 13,308 | — | ||||||||||||
Broker quotes |
62 | — | — | 62 | ||||||||||||
Internal models |
1,998 | — | 151 | 1,847 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate—non-U.S. |
15,368 | — | 13,459 | 1,909 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential mortgage-backed: |
||||||||||||||||
Pricing services |
5,995 | — | 5,995 | — | ||||||||||||
Broker quotes |
67 | — | — | 67 | ||||||||||||
Internal models |
57 | — | — | 57 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total residential mortgage-backed |
6,119 | — | 5,995 | 124 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Commercial mortgage-backed: |
||||||||||||||||
Pricing services |
3,248 | — | 3,248 | — | ||||||||||||
Broker quotes |
15 | — | — | 15 | ||||||||||||
Internal models |
23 | — | 5 | 18 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage-backed |
3,286 | — | 3,253 | 33 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other asset-backed: |
||||||||||||||||
Pricing services |
2,070 | — | 2,070 | — | ||||||||||||
Broker quotes |
643 | — | — | 643 | ||||||||||||
Internal models |
43 | — | 5 | 38 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other asset-backed |
2,756 | — | 2,075 | 681 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 62,214 | $ | — | $ | 56,701 | $ | 5,513 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: |
||||||||||||||||
Pricing services |
$ | 4,850 | $ | — | $ | 4,850 | $ | — | ||||||||
Internal models |
13 | — | — | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. government, agencies and government-sponsored enterprises |
4,863 | — | 4,850 | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Tax-exempt: |
||||||||||||||||
Pricing services |
503 | — | 503 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total tax-exempt |
503 | — | 503 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Government—non-U.S.: |
||||||||||||||||
Pricing services |
2,201 | — | 2,201 | — | ||||||||||||
Internal models |
10 | — | — | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total government—non-U.S. |
2,211 | — | 2,201 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. corporate: |
||||||||||||||||
Pricing services |
22,168 | — | 22,168 | — | ||||||||||||
Broker quotes |
250 | — | — | 250 | ||||||||||||
Internal models |
2,840 | — | 579 | 2,261 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total U.S. corporate |
25,258 | — | 22,747 | 2,511 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Corporate—non-U.S.: |
||||||||||||||||
Pricing services |
11,925 | — | 11,925 | — | ||||||||||||
Broker quotes |
78 | — | — | 78 | ||||||||||||
Internal models |
1,754 | — | 548 | 1,206 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total corporate—non-U.S. |
13,757 | — | 12,473 | 1,284 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential mortgage-backed: |
||||||||||||||||
Pricing services |
5,600 | — | 5,600 | — | ||||||||||||
Broker quotes |
36 | — | — | 36 | ||||||||||||
Internal models |
59 | — | — | 59 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total residential mortgage-backed |
5,695 | — | 5,600 | 95 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Commercial mortgage-backed: |
||||||||||||||||
Pricing services |
3,361 | — | 3,361 | — | ||||||||||||
Broker quotes |
15 | — | — | 15 | ||||||||||||
Internal models |
24 | — | — | 24 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial mortgage-backed |
3,400 | — | 3,361 | 39 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other asset-backed: |
||||||||||||||||
Pricing services |
2,328 | — | 2,328 | — | ||||||||||||
Broker quotes |
271 | — | — | 271 | ||||||||||||
Internal models |
9 | — | 9 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other asset-backed |
2,608 | — | 2,337 | 271 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 58,295 | $ | — | $ | 54,072 | $ | 4,223 | ||||||||
|
|
|
|
|
|
|
|
The following tables summarize the primary sources of data considered when determining fair value of equity securities as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 425 | $ | 424 | $ | 1 | $ | — | ||||||||
Broker quotes |
3 | — | — | 3 | ||||||||||||
Internal models |
96 | — | — | 96 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities |
$ | 524 | $ | 424 | $ | 1 | $ | 99 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 263 | $ | 261 | $ | 2 | $ | — | ||||||||
Broker quotes |
6 | — | — | 6 | ||||||||||||
Internal models |
92 | — | — | 92 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities |
$ | 361 | $ | 261 | $ | 2 | $ | 98 | ||||||||
|
|
|
|
|
|
|
|
The following tables summarize the primary sources of data considered when determining fair value of trading securities as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 496 | $ | — | $ | 496 | $ | — | ||||||||
Broker quotes |
194 | — | — | 194 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading securities |
$ | 690 | $ | — | $ | 496 | $ | 194 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services |
$ | 524 | $ | — | $ | 524 | $ | — | ||||||||
Broker quotes |
264 | — | — | 264 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading securities |
$ | 788 | $ | — | $ | 524 | $ | 264 | ||||||||
|
|
|
|
|
|
|
|
The following tables set forth our assets and liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
September 30, 2012 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets |
||||||||||||||||
Investments: |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 5,503 | $ | — | $ | 5,494 | $ | 9 | ||||||||
Tax-exempt |
302 | — | 302 | — | ||||||||||||
Government—non-U.S. |
2,574 | — | 2,566 | 8 | ||||||||||||
U.S. corporate |
26,306 | — | 23,557 | 2,749 | ||||||||||||
Corporate—non-U.S. |
15,368 | — | 13,459 | 1,909 | ||||||||||||
Residential mortgage-backed |
6,119 | — | 5,995 | 124 | ||||||||||||
Commercial mortgage-backed |
3,286 | — | 3,253 | 33 | ||||||||||||
Other asset-backed |
2,756 | — | 2,075 | 681 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
62,214 | — | 56,701 | 5,513 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities |
524 | 424 | 1 | 99 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other invested assets: |
||||||||||||||||
Trading securities |
690 | — | 496 | 194 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
1,256 | — | 1,253 | 3 | ||||||||||||
Foreign currency swaps |
30 | — | 30 | — | ||||||||||||
Credit default swaps |
6 | — | 1 | 5 | ||||||||||||
Equity index options |
24 | — | — | 24 | ||||||||||||
Forward bond purchase commitments |
68 | — | 68 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
1,384 | — | 1,352 | 32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities lending collateral |
181 | — | 181 | — | ||||||||||||
Derivatives counterparty collateral |
662 | — | 662 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other invested assets |
2,917 | — | 2,691 | 226 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Restricted other invested assets related to securitization entities |
393 | — | 199 | 194 | ||||||||||||
Other assets: |
||||||||||||||||
Reinsurance embedded derivatives (1) |
33 | — | 33 | — | ||||||||||||
Contingent receivable |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other assets |
42 | — | 33 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Reinsurance recoverable (2) |
11 | — | — | 11 | ||||||||||||
Separate account assets |
10,166 | 10,166 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 76,267 | $ | 10,590 | $ | 59,625 | $ | 6,052 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Policyholder account balances: |
||||||||||||||||
GMWB embedded derivatives (3) |
$ | 380 | $ | — | $ | — | $ | 380 | ||||||||
Fixed index annuity embedded derivatives (4) |
21 | — | — | 21 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total policyholder account balances |
401 | — | — | 401 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other liabilities: |
||||||||||||||||
Contingent purchase price |
31 | — | — | 31 | ||||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
354 | — | 354 | — | ||||||||||||
Interest rate swaps related to securitization entities |
29 | — | 29 | — | ||||||||||||
Inflation indexed swaps |
98 | — | 98 | — | ||||||||||||
Foreign currency swaps |
1 | — | 1 | — | ||||||||||||
Credit default swaps |
9 | — | — | 9 | ||||||||||||
Credit default swaps related to securitization entities |
136 | — | — | 136 | ||||||||||||
Equity return swaps |
7 | — | 7 | — | ||||||||||||
Other foreign currency contracts |
6 | — | 6 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
640 | — | 495 | 145 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other liabilities |
671 | — | 495 | 176 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Borrowings related to securitization entities |
60 | — | — | 60 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,132 | $ | — | $ | 495 | $ | 637 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with certain reinsurance agreements. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(3) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(4) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
December 31, 2011 | ||||||||||||||||
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets |
||||||||||||||||
Investments: |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 4,863 | $ | — | $ | 4,850 | $ | 13 | ||||||||
Tax-exempt |
503 | — | 503 | — | ||||||||||||
Government—non-U.S. |
2,211 | — | 2,201 | 10 | ||||||||||||
U.S. corporate |
25,258 | — | 22,747 | 2,511 | ||||||||||||
Corporate—non-U.S. |
13,757 | — | 12,473 | 1,284 | ||||||||||||
Residential mortgage-backed |
5,695 | — | 5,600 | 95 | ||||||||||||
Commercial mortgage-backed |
3,400 | — | 3,361 | 39 | ||||||||||||
Other asset-backed |
2,608 | — | 2,337 | 271 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
58,295 | — | 54,072 | 4,223 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities |
361 | 261 | 2 | 98 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other invested assets: |
||||||||||||||||
Trading securities |
788 | — | 524 | 264 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate swaps |
1,350 | — | 1,345 | 5 | ||||||||||||
Foreign currency swaps |
32 | — | 32 | — | ||||||||||||
Credit default swaps |
1 | — | 1 | — | ||||||||||||
Equity index options |
39 | — | — | 39 | ||||||||||||
Equity return swaps |
7 | — | 7 | — | ||||||||||||
Forward bond purchase commitments |
47 | — | 47 | — | ||||||||||||
Other foreign currency contracts |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
1,485 | — | 1,432 | 53 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Securities lending collateral |
406 | — | 406 | — | ||||||||||||
Derivatives counterparty collateral |
323 | — | 323 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other invested assets |
3,002 | — | 2,685 | 317 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Restricted other invested assets related to securitization entities |
376 | — | 200 | 176 | ||||||||||||
Other assets (1) |
29 | — | 29 | — | ||||||||||||
Reinsurance recoverable (2) |
16 | — | — | 16 | ||||||||||||
Separate account assets |
10,122 | 10,122 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 72,201 | $ | 10,383 | $ | 56,988 | $ | 4,830 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Policyholder account balances: |
||||||||||||||||
GMWB embedded derivatives (3) |
$ | 492 | $ | — | $ | — | $ | 492 | ||||||||
Fixed index annuity embedded derivatives (4) |
4 | — | — | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total policyholder account balances |
496 | — | — | 496 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other liabilities: |
||||||||||||||||
Contingent purchase price |
46 | — | — | 46 | ||||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate swaps |
376 | — | 376 | — | ||||||||||||
Interest rate swaps related to securitization entities |
28 | — | 28 | — | ||||||||||||
Inflation indexed swaps |
43 | — | 43 | — | ||||||||||||
Credit default swaps |
59 | — | 2 | 57 | ||||||||||||
Credit default swaps related to securitization entities |
177 | — | — | 177 | ||||||||||||
Equity return swaps |
4 | — | 4 | — | ||||||||||||
Other foreign currency contracts |
11 | — | 11 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
698 | — | 464 | 234 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other liabilities |
744 | — | 464 | 280 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Borrowings related to securitization entities |
48 | — | — | 48 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,288 | $ | — | $ | 464 | $ | 824 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Represents embedded derivatives associated with certain reinsurance agreements. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(3) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(4) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of July 1, 2012 |
Total realized
and unrealized gains (losses) |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 10 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | 9 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
9 | — | — | — | — | — | (1 | ) | — | — | 8 | — | ||||||||||||||||||||||||||||||||
U.S. corporate (1) |
2,849 | 5 | 34 | 58 | (4 | ) | — | (92 | ) | 36 | (137 | ) | 2,749 | 4 | ||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
1,864 | 2 | 17 | 106 | — | — | (88 | ) | 8 | — | 1,909 | — | ||||||||||||||||||||||||||||||||
Residential mortgage- backed |
120 | — | 3 | 12 | (12 | ) | — | (9 | ) | 13 | (3 | ) | 124 | — | ||||||||||||||||||||||||||||||
Commercial mortgage- backed |
33 | — | — | — | — | — | — | — | — | 33 | — | |||||||||||||||||||||||||||||||||
Other asset-backed |
597 | — | 10 | 66 | — | — | (25 | ) | 59 | (26 | ) | 681 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total fixed maturity securities |
5,482 | 7 | 64 | 242 | (16 | ) | — | (215 | ) | 116 | (167 | ) | 5,513 | 4 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Equity securities |
96 | — | — | 4 | (1 | ) | — | — | — | — | 99 | — | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
284 | 6 | — | — | (63 | ) | — | (2 | ) | — | (31 | ) | 194 | 5 | ||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
3 | — | — | — | — | — | — | — | — | 3 | — | |||||||||||||||||||||||||||||||||
Credit default swaps |
2 | 4 | — | — | — | — | (1 | ) | — | — | 5 | 4 | ||||||||||||||||||||||||||||||||
Equity index options |
27 | (17 | ) | — | 14 | — | — | — | — | — | 24 | (17 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total derivative assets |
32 | (13 | ) | — | 14 | — | — | (1 | ) | — | — | 32 | (13 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total other invested assets |
316 | (7 | ) | — | 14 | (63 | ) | — | (3 | ) | — | (31 | ) | 226 | (8 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
192 | 2 | — | — | — | — | — | — | — | 194 | 1 | |||||||||||||||||||||||||||||||||
Other assets: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent receivable |
17 | (8 | ) | — | — | — | — | — | — | — | 9 | (8 | ) | |||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
15 | (4 | ) | — | — | — | — | — | — | — | 11 | (4 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total Level 3 assets |
$ | 6,118 | $ | (10 | ) | $ | 64 | $ | 260 | $ | (80 | ) | $ | — | $ | (218 | ) | $ | 116 | $ | (198 | ) | $ | 6,052 | $ | (15 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(Amounts in millions) |
Beginning balance as of July 1, 2011 |
Total realized
and unrealized gains (losses) |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 13 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (12 | ) | $ | 1 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||
U.S. corporate (1) |
949 | (21 | ) | 39 | 41 | — | — | (7 | ) | 382 | (33 | ) | 1,350 | (21 | ) | |||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
371 | (15 | ) | 30 | — | — | — | (1 | ) | 20 | (35 | ) | 370 | (16 | ) | |||||||||||||||||||||||||||||
Residential mortgage- backed |
124 | 1 | (7 | ) | — | — | — | (12 | ) | 3 | (2 | ) | 107 | 1 | ||||||||||||||||||||||||||||||
Commercial mortgage- backed |
43 | — | (1 | ) | — | — | — | (2 | ) | 1 | — | 41 | — | |||||||||||||||||||||||||||||||
Other asset-backed |
265 | — | (4 | ) | — | — | — | (6 | ) | — | — | 255 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total fixed maturity securities |
1,766 | (35 | ) | 57 | 41 | — | — | (28 | ) | 406 | (82 | ) | 2,125 | (36 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Equity securitie |
106 | — | (1 | ) | — | (5 | ) | — | — | — | — | 100 | — | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
291 | (12 | ) | — | — | — | — | (5 | ) | — | — | 274 | (12 | ) | ||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
4 | 3 | — | — | — | — | (1 | ) | — | — | 6 | 3 | ||||||||||||||||||||||||||||||||
Credit default swaps |
4 | (4 | ) | — | — | — | — | — | — | — | — | (4 | ) | |||||||||||||||||||||||||||||||
Equity index options |
40 | 58 | — | — | — | — | (36 | ) | — | — | 62 | 37 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total derivative assets |
48 | 57 | — | — | — | — | (37 | ) | — | — | 68 | 36 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total other invested. assets |
339 | 45 | — | — | — | — | (42 | ) | — | — | 342 | 24 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
175 | (1 | ) | — | — | — | — | — | — | — | 174 | (1 | ) | |||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
(5 | ) | 26 | — | — | — | — | — | — | — | 21 | 26 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total Level 3 assets |
$ | 2,381 | $ | 35 | $ | 56 | $ | 41 | $ | (5 | ) | $ | — | $ | (70 | ) | $ | 406 | $ | (82 | ) | $ | 2,762 | $ | 13 | |||||||||||||||||||
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|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of January 1, 2012 |
Total realized
and unrealized gains (losses) |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 13 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9 | $ | (13 | ) | $ | 9 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
10 | — | — | — | — | — | (2 | ) | — | — | 8 | — | ||||||||||||||||||||||||||||||||
U.S. corporate (1) |
2,511 | 8 | 63 | 88 | (22 | ) | — | (129 | ) | 725 | (495 | ) | 2,749 | 10 | ||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
1,284 | 2 | 28 | 189 | (12 | ) | — | (127 | ) | 692 | (147 | ) | 1,909 | 1 | ||||||||||||||||||||||||||||||
Residential mortgage- backe |
95 | (1 | ) | 10 | 15 | (12 | ) | — | (23 | ) | 43 | (3 | ) | 124 | (1 | ) | ||||||||||||||||||||||||||||
Commercial mortgage- backed |
39 | — | 2 | — | — | — | (1 | ) | — | (7 | ) | 33 | — | |||||||||||||||||||||||||||||||
Other asset-backed |
271 | 1 | 17 | 276 | (22 | ) | — | (60 | ) | 224 | (26 | ) | 681 | 1 | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total fixed maturity securities |
4,223 | 10 | 120 | 568 | (68 | ) | — | (342 | ) | 1,693 | (691 | ) | 5,513 | 11 | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Equity securities |
98 | 1 | (2 | ) | 9 | (7 | ) | — | — | — | — | 99 | — | |||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
264 | 11 | — | 34 | (70 | ) | — | (18 | ) | 4 | (31 | ) | 194 | 12 | ||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
5 | — | — | — | — | — | (2 | ) | — | — | 3 | — | ||||||||||||||||||||||||||||||||
Credit default swaps |
— | 8 | — | — | — | — | (3 | ) | — | — | 5 | 8 | ||||||||||||||||||||||||||||||||
Equity index options |
39 | (46 | ) | — | 31 | — | — | — | — | — | 24 | (42 | ) | |||||||||||||||||||||||||||||||
Other foreign currency contracts |
9 | (11 | ) | — | 3 | — | — | (1 | ) | — | — | — | (11 | ) | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total derivative assets |
53 | (49 | ) | — | 34 | — | — | (6 | ) | — | — | 32 | (45 | ) | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total other invested assets |
317 | (38 | ) | — | 68 | (70 | ) | — | (24 | ) | 4 | (31 | ) | 226 | (33 | ) | ||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
176 | 18 | — | 100 | (100 | ) | — | — | — | — | 194 | 13 | ||||||||||||||||||||||||||||||||
Other assets: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent receivable |
— | (7 | ) | — | — | — | 16 | — | — | — | 9 | (7 | ) | |||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
16 | (7 | ) | — | — | — | 2 | — | — | — | 11 | (7 | ) | |||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total Level 3 assets |
$ | 4,830 | $ | (23 | ) | $ | 118 | $ | 745 | $ | (245 | ) | $ | 18 | $ | (366 | ) | $ | 1,697 | $ | (722 | ) | $ | 6,052 | $ | (23 | ) | |||||||||||||||||
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|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. During the second quarter of 2012, we began classifying private securities without an external rating as Level 3, which resulted in a significant number of securities being transferred into Level 3. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(Amounts in millions) |
Beginning balance as of January 1, 2011 |
Total realized
and unrealized gains (losses) |
Sales | Issuances | Settlements |
Transfer into |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total gains (losses)
included
in (loss) attributable to assets |
|||||||||||||||||||||||||||||||||||
Included in net income (loss) |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Purchases | Level 3 | still held | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises |
$ | 11 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 12 | $ | (22 | ) | $ | 1 | $ | — | |||||||||||||||||||||
Government—non-U.S. |
1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||
U.S. corporate (1) |
1,100 | (13 | ) | 45 | 71 | (5 | ) | — | (70 | ) | 634 | (412 | ) | 1,350 | (13 | ) | ||||||||||||||||||||||||||||
Corporate—non-U.S. (1) |
368 | (26 | ) | 27 | 40 | (35 | ) | — | (8 | ) | 225 | (221 | ) | 370 | (26 | ) | ||||||||||||||||||||||||||||
Residential mortgage-backed |
143 | — | (15 | ) | 3 | — | — | (24 | ) | 3 | (3 | ) | 107 | — | ||||||||||||||||||||||||||||||
Commercial mortgage-backed |
50 | — | 1 | — | — | — | (11 | ) | 1 | — | 41 | — | ||||||||||||||||||||||||||||||||
Other asset-backed |
268 | (1 | ) | 5 | 8 | (8 | ) | — | (32 | ) | 15 | — | 255 | (1 | ) | |||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total fixed maturity securities |
1,941 | (40 | ) | 63 | 122 | (48 | ) | — | (145 | ) | 890 | (658 | ) | 2,125 | (40 | ) | ||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Equity securities |
87 | 1 | — | 24 | (10 | ) | — | (2 | ) | — | — | 100 | — | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Other invested assets: |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
329 | 4 | — | 5 | (41 | ) | — | (23 | ) | — | — | 274 | 4 | |||||||||||||||||||||||||||||||
Derivative assets: |
||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps |
5 | 2 | — | — | — | — | (1 | ) | — | — | 6 | 2 | ||||||||||||||||||||||||||||||||
Credit default swaps |
6 | (6 | ) | — | — | — | — | — | — | — | — | (6 | ) | |||||||||||||||||||||||||||||||
Equity index options |
33 | 31 | — | 39 | — | — | (41 | ) | — | — | 62 | 10 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total derivative assets |
44 | 27 | — | 39 | — | — | (42 | ) | — | — | 68 | 6 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total other invested assets |
373 | 31 | — | 44 | (41 | ) | — | (65 | ) | — | — | 342 | 10 | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Restricted other invested assets related to securitization entities |
171 | 3 | — | — | — | — | — | — | — | 174 | 3 | |||||||||||||||||||||||||||||||||
Reinsurance recoverable (2) |
(5 | ) | 24 | — | — | — | 2 | — | — | — | 21 | 24 | ||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total Level 3 assets |
$ | 2,567 | $ | 19 | $ | 63 | $ | 190 | $ | (99 | ) | $ | 2 | $ | (212 | ) | $ | 890 | $ | (658 | ) | $ | 2,762 | $ | (3 | ) | ||||||||||||||||||
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|
|
(1) |
The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
The following tables present the gains and losses included in net income (loss) from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months
ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Total realized and unrealized gains (losses) included in net income (loss): |
||||||||||||||||
Net investment income |
$ | 8 | $ | 7 | $ | 22 | $ | 18 | ||||||||
Net investment gains (losses) |
(18 | ) | 28 | (45 | ) | 1 | ||||||||||
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|
|||||||||
Total |
$ | (10 | ) | $ | 35 | $ | (23 | ) | $ | 19 | ||||||
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|
|
|
|
|
|||||||||
Total gains (losses) included in net income (loss) attributable to assets still held: |
||||||||||||||||
Net investment income |
$ | 4 | $ | 7 | $ | 17 | $ | 19 | ||||||||
Net investment gains (losses) |
(19 | ) | 6 | (40 | ) | (22 | ) | |||||||||
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|
|||||||||
Total |
$ | (15 | ) | $ | 13 | $ | (23 | ) | $ | (3 | ) | |||||
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|
|
The following tables present the gains and losses included in net (income) loss from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Total realized and unrealized (gains) losses included in net (income) loss: |
||||||||||||||||
Net investment income |
$ | — | $ | — | $ | — | $ | — | ||||||||
Net investment (gains) losses |
(118 | ) | 611 | (202 | ) | 588 | ||||||||||
Total |
$ | (118 | ) | $ | 611 | $ | (202 | ) | $ | 588 | ||||||
Total (gains) losses included in net (income) loss attributable to liabilities still held: |
||||||||||||||||
Net investment income |
$ | — | $ | — | $ | — | $ | — | ||||||||
Net investment (gains) losses |
(116 | ) | 611 | (200 | ) | 588 | ||||||||||
Total |
$ | (116 | ) | $ | 611 | $ | (200 | ) | $ | 588 | ||||||
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of July 1, 2012 |
Total realized
and unrealized (gains) losses |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||||||||||||||||
Included in net (income) loss |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 453 | $ | (83 | ) | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 380 | $ | (81 | ) | ||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
10 | 1 | — | — | — | 10 | — | — | — | 21 | 1 | |||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total policyholder account balances |
463 | (82 | ) | — | — | — | 20 | — | — | — | 401 | (80 | ) | |||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Other liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent purchase price |
31 | — | — | — | — | — | — | — | — | 31 | — | |||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
37 | (19 | ) | — | — | — | — | (9 | ) | — | — | 9 | (19 | ) | ||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
155 | (20 | ) | — | 1 | — | — | — | — | — | 136 | (20 | ) | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total derivative liabilities |
192 | (39 | ) | — | 1 | — | — | (9 | ) | — | — | 145 | (39 | ) | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total other liabilities |
223 | (39 | ) | — | 1 | — | — | (9 | ) | — | — | 176 | (39 | ) | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Borrowings related to securitization entities |
57 | 3 | — | — | — | — | — | — | — | 60 | 3 | |||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Total Level 3 liabilities |
$ | 743 | $ | (118 | ) | $ | — | $ | 1 | $ | — | $ | 20 | $ | (9 | ) | $ | — | $ | — | $ | 637 | $ | (116 | ) | |||||||||||||||||||
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|
|
(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
(Amounts in millions) |
Beginning balance as of July 1, 2011 |
Total realized
and unrealized (gains) losses |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total
(gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||||||||||||||||
Included in net (income) loss |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 113 | $ | 480 | $ | — | $ | — | $ | — | $ | 9 | $ | — | $ | — | $ | — | $ | 602 | $ | 480 | ||||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
5 | (1 | ) | — | — | — | — | — | — | — | 4 | (1 | ) | |||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total policyholder account balances |
118 | 479 | — | — | — | 9 | — | — | — | 606 | 479 | |||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||
Other liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent purchase price |
— | 22 | — | — | — | 22 | — | — | — | 44 | 22 | |||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
9 | 66 | — | — | — | — | — | — | — | 75 | 66 | |||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
126 | 54 | — | — | — | — | — | — | — | 180 | 54 | |||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total derivative liabilities |
135 | 120 | — | — | — | — | — | — | — | 255 | 120 | |||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||
Total other liabilities |
135 | 142 | — | — | — | 22 | — | — | — | 299 | 142 | |||||||||||||||||||||||||||||||||
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Borrowings related to securitization entities |
58 | (10 | ) | — | — | — | — | — | — | — | 48 | (10 | ) | |||||||||||||||||||||||||||||||
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Total Level 3 liabilities |
$ | 311 | $ | 611 | $ | — | $ | — | $ | — | $ | 31 | $ | — | $ | — | $ | — | $ | 953 | $ | 611 | ||||||||||||||||||||||
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(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) |
Beginning balance as of January 1, 2012 |
Total
realized and unrealized (gains) losses |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2012 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||||||||||||||||
Included in net (income) loss |
Included in OCI |
|||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 492 | $ | (139 | ) | $ | — | $ | — | $ | — | $ | 27 | $ | — | $ | — | $ | — | $ | 380 | $ | (134 | ) | ||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
4 | 2 | — | — | — | 15 | — | — | — | 21 | 2 | |||||||||||||||||||||||||||||||||
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Total policyholder account balances |
496 | (137 | ) | — | — | — | 42 | — | — | — | 401 | (132 | ) | |||||||||||||||||||||||||||||||
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Other liabilities: |
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Contingent purchase price |
46 | 3 | — | — | — | — | (18 | ) | — | — | 31 | 3 | ||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
57 | (37 | ) | — | 2 | — | — | (13 | ) | — | — | 9 | (40 | ) | ||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
177 | (43 | ) | — | 2 | — | — | — | — | — | 136 | (43 | ) | |||||||||||||||||||||||||||||||
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Total derivative liabilities |
234 | (80 | ) | — | 4 | — | — | (13 | ) | — | — | 145 | (83 | ) | ||||||||||||||||||||||||||||||
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Total other liabilities |
280 | (77 | ) | — | 4 | — | — | (31 | ) | — | — | 176 | (80 | ) | ||||||||||||||||||||||||||||||
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Borrowings related to securitization entities |
48 | 12 | — | — | — | — | — | — | — | 60 | 12 | |||||||||||||||||||||||||||||||||
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Total Level 3 liabilities |
$ | 824 | $ | (202 | ) | $ | — | $ | 4 | $ | — | $ | 42 | $ | (31 | ) | $ | — | $ | — | $ | 637 | $ | (200 | ) | |||||||||||||||||||
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(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
Beginning balance as of January 1, 2011 |
Total
realized and |
Purchases | Sales | Issuances | Settlements | Transfer into Level 3 |
Transfer out of Level 3 |
Ending balance as of September 30, 2011 |
Total (gains) losses included in net (income) attributable to liabilities still held |
|||||||||||||||||||||||||||||||||||
(Amounts in millions) |
Included in net (income) |
Included in OCI |
||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: |
||||||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) |
$ | 121 | $ | 452 | $ | — | $ | — | $ | — | $ | 29 | $ | — | $ | — | $ | — | $ | 602 | $ | 452 | ||||||||||||||||||||||
Fixed index annuity embedded derivatives (2) |
5 | (1 | ) | — | — | — | — | — | — | — | 4 | (1 | ) | |||||||||||||||||||||||||||||||
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Total policyholder account balances |
126 | 451 | — | — | — | 29 | — | — | — | 606 | 451 | |||||||||||||||||||||||||||||||||
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Other liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Contingent purchase price |
— | 23 | — | — | — | 21 | — | — | — | 44 | 23 | |||||||||||||||||||||||||||||||||
Derivative liabilities: |
||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps |
7 | 66 | — | 3 | — | — | (1 | ) | — | — | 75 | 66 | ||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities |
129 | 51 | — | — | — | — | — | — | — | 180 | 51 | |||||||||||||||||||||||||||||||||
Equity index options |
3 | — | — | — | — | — | (3 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||
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Total derivative liabilities |
139 | 117 | — | 3 | — | — | (4 | ) | — | — | 255 | 117 | ||||||||||||||||||||||||||||||||
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Total other liabilities |
139 | 140 | — | 3 | — | 21 | (4 | ) | — | — | 299 | 140 | ||||||||||||||||||||||||||||||||
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Borrowings related to securitization entities |
51 | (3 | ) | — | — | — | — | — | — | — | 48 | (3 | ) | |||||||||||||||||||||||||||||||
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Total Level 3 liabilities |
$ | 316 | $ | 588 | $ | — | $ | 3 | $ | — | $ | 50 | $ | (4 | ) | $ | — | $ | — | $ | 953 | $ | 588 | |||||||||||||||||||||
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(1) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(2) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
The following table presents a summary of the significant unobservable inputs used for certain fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2012:
(Amounts in millions) |
Valuation technique |
Fair value |
Unobservable input |
Range (weighted-average) |
||||||
Assets |
||||||||||
Fixed maturity securities: |
||||||||||
U.S. corporate |
Matrix pricing | $ | 2,611 | Credit spreads | 63bps - 1,127bps (218bps) | |||||
Corporate—non-U.S. |
Matrix pricing | 1,847 | Credit spreads | 83bps - 376bps (204bps) | ||||||
Derivative assets: |
||||||||||
Interest rate swaps |
Discounted cash flows | 3 | Interest rate volatility | 25% - 35% (30%) | ||||||
Credit default swaps (1) |
Discounted cash flows | 5 | Credit spreads | 15bps - 89bps (49bps) | ||||||
Equity index option |
Discounted cash flows | 24 | Equity index volatility | 15% - 48% (30%) | ||||||
Other assets: |
||||||||||
Contingent receivable |
Discounted cash flows | 9 | Discount rate | 23% | ||||||
Liabilities |
||||||||||
Policyholder account balances: |
||||||||||
Withdrawal utilization rate | —% - 97% | |||||||||
Lapse rate | —% - 25% | |||||||||
Non-performance risk (credit spreads) |
55bps - 90bps (80bps) | |||||||||
GMWB embedded derivatives (2) |
Stochastic cash flow model | 380 | Equity index volatility | 19% - 25% (22%) | ||||||
Fixed index annuity embedded derivatives (3) |
Option budget method | 21 |
Expected future interest credited |
1% - 3% (2%) | ||||||
Other liabilities: |
||||||||||
Contingent purchase price |
Discounted cash flows | 31 | Discount rate | 23% | ||||||
Derivative liabilities: |
||||||||||
Credit default swaps (1) |
Discounted cash flows | 9 | Credit spreads | 158bps - 211bps (197bps) |
(1) |
Unobservable input valuation based on the current market credit default swap premium. |
(2) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(3) |
Represents the embedded derivatives associated with our fixed index annuity liabilities. |
|
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||||||||
Pre-tax income |
$ | 99 | $ | 13 | $ | 367 | $ | 21 | ||||||||||||||||||||||||
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Statutory U.S. federal income tax rate |
$ | 35 | 35.0 | % | $ | 5 | 35.0 | % | $ | 128 | 35.0 | % | $ | 7 | 35.0 | % | ||||||||||||||||
Increase (reduction) in rate resulting from: |
||||||||||||||||||||||||||||||||
State income tax, net of federal income tax effect |
(1 | ) | (1.1 | ) | (1 | ) | (9.0 | ) | — | 0.1 | 2 | 9.9 | ||||||||||||||||||||
Benefit on tax favored investments |
(3 | ) | (3.5 | ) | (12 | ) | (93.9 | ) | (5 | ) | (1.5 | ) | (13 | ) | (60.5 | ) | ||||||||||||||||
Effect of foreign operations |
(21 | ) | (21.6 | ) | 6 | 44.5 | (40 | ) | (10.9 | ) | 14 | 66.8 | ||||||||||||||||||||
Sale of subsidiary |
— | — | — | — | 8 | 2.3 | — | — | ||||||||||||||||||||||||
Non-deductible expenses |
— | 0.8 | 1 | 4.8 | 2 | 0.4 | 1 | 3.2 | ||||||||||||||||||||||||
Interest on uncertain tax positions |
(2 | ) | (1.9 | ) | (1 | ) | (4.8 | ) | (4 | ) | (1.2 | ) | — | (1.6 | ) | |||||||||||||||||
Non-deductible goodwill |
19 | 19.1 | — | — | 19 | 5.1 | — | — | ||||||||||||||||||||||||
Other, net |
2 | 2.5 | (5 | ) | (30.4 | ) | — | 0.1 | (3 | ) | (14.7 | ) | ||||||||||||||||||||
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Effective rate |
$ | 29 | 29.3 | % | $ | (7 | ) | (53.8 | )% | $ | 108 | 29.4 | % | $ | 8 | 38.1 | % | |||||||||||||||
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The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenues: |
||||||||||||||||
U.S. Life Insurance segment: |
||||||||||||||||
Life insurance |
$ | 533 | $ | 532 | $ | 1,404 | $ | 1,545 | ||||||||
Long-term care insurance |
809 | 785 | 2,381 | 2,227 | ||||||||||||
Fixed annuities |
284 | 243 | 838 | 792 | ||||||||||||
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U.S. Life Insurance segment’s revenues |
1,626 | 1,560 | 4,623 | 4,564 | ||||||||||||
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International Protection segment’s revenues |
198 | 245 | 627 | 796 | ||||||||||||
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Wealth Management segment’s revenues |
82 | 115 | 316 | 339 | ||||||||||||
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International Mortgage Insurance segment: |
||||||||||||||||
Canada |
197 | 207 | 591 | 623 | ||||||||||||
Australia |
140 | 184 | 421 | 467 | ||||||||||||
Other Countries |
13 | 17 | 45 | 57 | ||||||||||||
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International Mortgage Insurance segment’s revenues |
350 | 408 | 1,057 | 1,147 | ||||||||||||
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U.S. Mortgage Insurance segment’s revenues |
154 | 171 | 513 | 518 | ||||||||||||
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Runoff segment’s revenues |
92 | 18 | 289 | 363 | ||||||||||||
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Corporate and Other’s revenues |
34 | 4 | 60 | 17 | ||||||||||||
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Total revenues |
$ | 2,536 | $ | 2,521 | $ | 7,485 | $ | 7,744 | ||||||||
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The following is a summary of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities to net income (loss) for the periods indicated:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
(Amounts in millions) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
U.S. Life Insurance segment: |
||||||||||||||||
Life insurance |
$ | 22 | $ | 64 | $ | 58 | $ | 163 | ||||||||
Long-term care insurance |
45 | 17 | 94 | 71 | ||||||||||||
Fixed annuities |
19 | 21 | 62 | 60 | ||||||||||||
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U.S. Life Insurance segment’s net operating income |
86 | 102 | 214 | 294 | ||||||||||||
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International Protection segment’s net operating income |
8 | 22 | 16 | 72 | ||||||||||||
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Wealth Management segment’s net operating income |
10 | 12 | 34 | 35 | ||||||||||||
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International Mortgage Insurance segment: |
||||||||||||||||
Canada |
42 | 40 | 120 | 119 | ||||||||||||
Australia |
57 | 36 | 80 | 142 | ||||||||||||
Other Countries |
(5 | ) | (8 | ) | (23 | ) | (16 | ) | ||||||||
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International Mortgage Insurance segment’s net operating income |
94 | 68 | 177 | 245 | ||||||||||||
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U.S. Mortgage Insurance segment’s net operating loss |
(38 | ) | (79 | ) | (106 | ) | (417 | ) | ||||||||
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Runoff segment’s net operating income (loss) |
9 | (7 | ) | 38 | 12 | |||||||||||
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Corporate and Other’s net operating loss |
(48 | ) | (56 | ) | (141 | ) | (217 | ) | ||||||||
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Net operating income |
121 | 62 | 232 | 24 | ||||||||||||
Net investment gains (losses), net of taxes and other adjustments |
(1 | ) | (78 | ) | (4 | ) | (117 | ) | ||||||||
Goodwill impairment, net of taxes |
(86 | ) | — | (86 | ) | — | ||||||||||
Gain on sale of business, net of taxes |
— | — | 15 | — | ||||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders |
34 | (16 | ) | 157 | (93 | ) | ||||||||||
Add: net income attributable to noncontrolling interests |
36 | 36 | 102 | 106 | ||||||||||||
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Net income |
$ | 70 | $ | 20 | $ | 259 | $ | 13 | ||||||||
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The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
(Amounts in millions) |
September 30, 2012 |
December 31, 2011 |
||||||
Assets: |
||||||||
U.S. Life Insurance |
$ | 79,499 | $ | 75,547 | ||||
International Protection |
2,220 | 2,375 | ||||||
Wealth Management |
460 | 523 | ||||||
International Mortgage Insurance |
10,233 | 9,643 | ||||||
U.S. Mortgage Insurance |
2,491 | 2,966 | ||||||
Runoff |
15,670 | 16,031 | ||||||
Corporate and Other |
3,814 | 5,102 | ||||||
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Total assets |
$ | 114,387 | $ | 112,187 | ||||
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